IBM has a beta of 0.85. IBMs market value of debt is approximately $78.31 billion and its
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IBM has a beta of 0.85. IBM’s market value of debt is approximately $78.31 billion and its total market value of equity is $118.18 billion. IBM’s average cost of debt capital (pretax) is approximately 0.92% and its marginal (statutory) income tax rate is 21%. Assume that the risk‑free rate is 2.03% and the market risk premium is 5%.
a. Interpret IBM’s beta value.
b. Estimate its cost of equity capital.
c. Estimate IBM’s after‑tax cost of debt capital.
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