Honeywell has 9.5 million shares outstanding, and expects its free cash flow to be $14.93 million next year, which is expected to grow by 4.4%

per year thereafter. Due to limited data, you do not have an accurate assessment of its equity beta. However, you do have beta data for UAL, another firm in the same industry: Honeywell has a much lower debt-equity ratio of 0.42, which is expected to remain stable, and its debt is risk-free. Their corporate tax rate is 35%, the risk-free rate is 4.7%, and the expected return on the market portfolio is 11.3%.

 

          Equity Beta     Debt Beta        Debt-Equity Ratio
UAL         2.10               0.42                       1.4

 

a. Estimate Honeywell's equity cost of capital.

b. Estimate Honeywell's share price.

Answer rating: 100% (QA)

To estimate Honeywells equity cost of capital Ke you can use the Capital Asset Pricing Model CAPM Th... View the full answer