As a portfolio manager, you are deciding whether to add
As a portfolio manager, you are deciding whether to add Crico stock to your portfolio. Crico Corporation is a publicly listed real estate investment trust. The current trading price of Crico’s stock is $175 per share. You have assembled the following financial information:
- The market value of its debt is $70 billion.
- The equity beta is .80; the market return is 4 percent; the risk-free rate is 2 percent.
- The company has 330 million shares outstanding
- The before-tax cost of debt is 6 percent.
- The tax rate is 35 percent.
- The company’s capital structure is 60 percent debt, and 40 percent common stock. There is no preferred stock.
- BCC’s FCFF for the year just ended is $1 billion. FCFF is expected to grow at a constant rate of 3 percent forever.
Expected cost of equity (using CAPM) = risk-free rate + beta*(market return - risk-free rate)
= 2% + 0.80*(4% - 2%) = 3.60%
What is the estimated weighted average cost of capital?