You are trying to estimate the cost of capital for La Coste, an upscale specialty retailer. The
Question:
You are trying to estimate the cost of capital for La Coste, an upscale specialty retailer. The firm is in only one business, specialty retailing; comparable firms have an average published beta of 1.15, an average debt ratio of 30% and an average tax rate of 40%. The firm has provided you with the following information:
The regression beta is 0.75 with a standard error of 0.5.
The firm’s bonds are rated A, and the default spread for A rated bond is 0.015. The company plans to maintain its current debt ratio of 20%.
The Treasury bond rate is 0.042 and the equity risk premium is 0.064.
The tax rate for La Coste is 40%.
What is the average unlevered beta for the comparable firms?
Answer for part 1
Estimate La Coste's beta based upon the comparable firms (i.e. Bottom up beta)
Answer for part 2
What is La Coste's before tax cost of debt?
Answer for part 3
What is La Coste's after tax cost of debt?
Answer for part 4
Use beta calculated in part two to calculate La Coste's cost of equity?
Answer for part 5
What is the WACC?
Answer for part 6
Expert Answer:
Answer to part 1 Average Debt ratio of comparable firms 30 Average Equity ratio 1 average debt ratio ... View the full answer
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
