A specialty goods company based in India is considering establishing manufacturing facilities in the United States through a wholly owned subsidiary. It has approached two different investment banking advisors; Investor advisor A and Investor advisor B for estimates of what its costs of capital would be several years into the future when it planned to list its American subsidiary on a U.S. stock exchange. The following assumptions are provided by the two different advisors:

Assumptions	Investor advisor A	Investor advisor B
Estimated beta:	1.20	1.15
Risk-free rate of interest	2.5%	2.5%
Estimate of Company's cost of debt in US market	7.2%	7.5%
Expected rate of return on market portfolio of stocks	9.5%	12.2%
Corporate tax rate	35.0%	35.0%
Proportion of debt	40%	45%
Proportion of equity	60%	55%

Using the assumptions listed above, calculate for each Investor advisor:

1. a) the company's cost of equity (2 marks)
2. b) the company's cost of debt (2 marks)
3. c) the company's weighted average cost of capital (2 marks)

Answer rating: 100% (QA)

Capital Cost Calculations for the Indian Specialty Goods Company We will calculate the cost of equit... View the full answer