Suppose stock in Babolat Corporation has a beta of 0.80. The market risk premium is 6%, and the risk-free rate is 6%. Babolat's last dividend was €1.20 per share, and the dividend is expected to grow at 8% indefinitely. The stock currently sells for €45 per share. Samsung has a target debt-equity ratio of 0.50. Its cost of debt is 9%.

Instructions:

What is Babolat's cost of equity capital? Assume that you equally believe in the CAPM approach and the dividend growth model?

What is Warren's WACC?

Babolat is seeking €30 million for a new project. The necessary funds will have to be raised externally. Babolat's flotation costs for selling debt and equity are 2% and 16%, respectively. If flotation costs are considered, what is the cost of the new project?

Under what circumstances would it is appropriate for Babolat Corporation to use different costs of capital for its different operating divisions? What are two techniques you could use to develop a rough estimate for each division's cost of capital? 

Answer rating: 100% (QA)

To calculate Babolats cost of equity capital using the CAPM approach we use the formula Cost of Equity RiskFree Rate BetaMarket Risk Premium Cost of E... View the full answer