Question 5 [5 marks] IKEA Holding is considering going public and currently valuing its shares for...

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Question 5 [5 marks] IKEA Holding is considering going public and currently valuing its shares for an initial public offering (IPO). The analyst of IKEA has identified Williams-Sonoma, Inc. (NYSE: WSM) as a comparable firm with similar business characteristics and has estimated the following: Williams-Sonoma has $2 billion equity and $4 billion debt. Williams-Sonoma has an equity beta of 0.6 and a debt beta of 0.1. It faces a marginal tax rate of 25%. The risk-free rate is 5% and the market risk premium is 10%. Answer questions a) and b) below. a) Find the unlevered cost of capital for the comparable firm Williams-Sonoma. (Lecture notes pp.31-36) Answer (show the steps/calculation toward your results): b) Suppose IKEA has $20 billion debt and $32 billion equity. Its debt beta is estimated at 0.1. It faces a marginal tax rate of 20%. Calculate the cost of equity capital for IKEA. (Lecture notes pp.37-39) Answer (show the steps/calculation toward your results): Question 5 [5 marks] IKEA Holding is considering going public and currently valuing its shares for an initial public offering (IPO). The analyst of IKEA has identified Williams-Sonoma, Inc. (NYSE: WSM) as a comparable firm with similar business characteristics and has estimated the following: Williams-Sonoma has $2 billion equity and $4 billion debt. Williams-Sonoma has an equity beta of 0.6 and a debt beta of 0.1. It faces a marginal tax rate of 25%. The risk-free rate is 5% and the market risk premium is 10%. Answer questions a) and b) below. a) Find the unlevered cost of capital for the comparable firm Williams-Sonoma. (Lecture notes pp.31-36) Answer (show the steps/calculation toward your results): b) Suppose IKEA has $20 billion debt and $32 billion equity. Its debt beta is estimated at 0.1. It faces a marginal tax rate of 20%. Calculate the cost of equity capital for IKEA. (Lecture notes pp.37-39) Answer (show the steps/calculation toward your results):

Answer rating: 100% (QA)

a To find the unlevered cost of capital Ku for WilliamsSonoma we can use the Hamada equation Ku Ke 1 ... View the full answer