Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures computer hardware and offers related technology services. Target Stores operates a chain of general merchandise discount retail stores. Selected data for these companies appear in the following table (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value.

Required
a. Assume that the intermediate-term yields on U.S. government Treasury securities are roughly 3.5 percent. Assume that the market risk premium is 5.0 percent.
Compute the cost of equity capital for each of the three companies.
b. Compute the weighted average cost of capital for each of the three companies.
c. Compute the unlevered market (asset) beta for each of the three companies.
d. Assume for this part that each company is a candidate for a potential leveraged buyout. The buyers intend to implement a capital structure that has 75 percent debt (with a pretax borrowing cost of 8.0 percent) and 25 percent common equity.
Project the weighted average cost of capital for each company based on the new capital structure. To what extent do these revised weighted average costs of capital differ from those computed in Partb?

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Whirlpool IBM Target Stores $44,106 Total Assets Interest-Bearing Debt Average Pretax Borrowing Cost $13,532 2,597 6.1% $109,524 33,925 4.3% 4.9% 13,465 $110,984 35.0% 0.78 $13,712 $22,521 35.0% 3,006 Income Tax Rate Market Equity Beta 35.0%