CarMax is a publicly-traded car dealership. Most car dealerships use debt as part of their capital structure... the industry average debt-to-value ratio is 26%. However, CarMax has no debt in their capital structure. Currently, CarMax has an equity beta of 1.15. The risk-free rate of return is 3.8% and the market risk premium is 6.5%. Assume M&M perfect capital markets.

a. What is the equity cost of capital for CarMax?

b. What would be CarMax's equity cost of capital if they had the industry-average level of debt? Assume that CarMax's cost of debt at the industry-average level of debt would be

6.8%.

Answer rating: 100% (QA)

To calculate the equity cost of capital Ke for CarMax a Since CarMax has no debt its equity cost of ... View the full answer