Question: ICBM develops and manufactures computer hardware and offers related technology services. The data in the following table (amounts in millions of dollars) applies to ICBM:
ICBM develops and manufactures computer hardware and offers related technology services. The data in the following table (amounts in millions of dollars) applies to ICBM:
| Total assets | $122,278 |
| Interest bearing debt | $50,792 |
| Average pretax borrowing cost | 5.6% |
| Common equity: | |
| Book value | $22,907 |
| Market value | $97,985 |
| Income tax rate | 39.0% |
| Market equity beta | .8 |
a. Assume that the intermediate-term yields on U.S. government Treasury securities are 2.7%. Assume that the market risk premium is 5.6%. Compute the cost of equity capital for ICBM. Enter your result as a percentage rounded to two decimal places.
b. Compute the weighted-average cost of capital for ICBM. Enter your result as a percentage rounded to two decimal places.
c. Compute the unlevered market (asset) beta for ICBM. Enter your result rounded to two decimal places.
d. Assume that ICBM is a candidate for a potential leveraged buyout. The buyers intend to implement a capital structure that has 74.0% debt (with a pretax borrowing cost of 7.9%) and 26.0% common equity. Project the weighted average cost of capital for ICBM based on the new capital structure. Enter your result as a percentage rounded to two decimal places.
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