IKEA Holdings is considering launching a restaurant chain, tentatively named Kitchen. The CFO of the firm...

Transcribed Image Text:

IKEA Holdings is considering launching a restaurant chain, tentatively named Kitchen". The CFO of the firm wants to find out the cost of capital for the new business and has collected the following information: IKEA Kitchen requires a total capital infusion of $300 million, which will be financed through a debt issue of $120 million and an equity issue of $180 million. The risk-free rate is 6% and the expected return on the market portfolio is 12%. The CAPM beta for debt capital is estimated at 0. The cost of debt capital is therefore estimated at 6% according to the CAPM. The CAPM beta for equity capital is estimated at 2.0. The CFO will determine the cost of equity capital using the CAPM. Assume that the firm will face a marginal tax rate of 0. Required: Calculate the cost of equity capital for IKEA Kitchen to determine its weighted average cost of capital (WACC). (10 Points) IKEA Holdings is considering launching a restaurant chain, tentatively named Kitchen". The CFO of the firm wants to find out the cost of capital for the new business and has collected the following information: IKEA Kitchen requires a total capital infusion of $300 million, which will be financed through a debt issue of $120 million and an equity issue of $180 million. The risk-free rate is 6% and the expected return on the market portfolio is 12%. The CAPM beta for debt capital is estimated at 0. The cost of debt capital is therefore estimated at 6% according to the CAPM. The CAPM beta for equity capital is estimated at 2.0. The CFO will determine the cost of equity capital using the CAPM. Assume that the firm will face a marginal tax rate of 0. Required: Calculate the cost of equity capital for IKEA Kitchen to determine its weighted average cost of capital (WACC). (10 Points)