MariaGonzalez, Ganado's Chief FinancialOfficer, estimates therisk-free rate to be 3.20%, thecompany's credit risk premium is 3.60%, the
Question:
MariaGonzalez, Ganado's Chief FinancialOfficer, estimates therisk-free rate to be 3.20%, thecompany's credit risk premium is 3.60%, the domestic beta is estimated at 1.14, the international beta is estimated at 0.87, and thecompany's capital structure is now 65% debt. The expected rate of return on the market portfolio held by awell-diversified domestic investor is 9.70% and the expected return on a larger globally integrated equity market portfolio is 8.70%. Thebefore-tax cost of debt estimated by observing the current yield onGanado's outstanding bonds combined with bank debt is 7.90% and thecompany's effective tax rate is 35%. For both the domestic CAPM andICAPM, calculate thefollowing:
a.Ganado's cost of equity
b.Ganado's after-tax cost of debt
c.Ganado's weighted average cost of capital