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11.11 CALCULATING THE COST OF CAPITAL. Whirlpool manufactures and sells home appliances under… 1 answer below » 11.11 CALCULATING THE COST OF CAPITAL. Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures com- puter hardware and offers related technology services. Target Stores operates a chain of gen- eral merchandise discount retail stores. Selected data for these companies appear in the following table (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value. View complete question » Whirlpool IBM Target Stores 11.11 CALCULATING THE COST OF CAPITAL. Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures com- puter hardware and offers related technology services. Target Stores operates a chain of gen- eral merchandise discount retail stores. Selected data for these companies appear in the following table (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value. Whirlpool IBM Target Stores Total Assets $13,532 $109,524 $44,106 Interest-Bearing Debt $ 2,597 $ 33,925 $18,752 Average Pretax Borrowing Cost 6.1% 4.3% 4.9% Common Equity: Book Value $ 3,006 $ 13,465 $13,712 Market Value $ 2,959 $110,984 $22,521 Income Tax Rate 35.0% 35.0% 35.0% Market Equity Beta 2.27 0.78 1.20 Required a. Assume that the intermediate-term yields on U.S. government Treasury securities are roughly 3.5 percent. Assume that the market risk premium is 5.0 percent. Compute the cost of equity capital for each of the three companies. b. Compute the weighted average cost of capital for each of the three companies. c. Compute the unlevered market (asset) beta for each of the three companies. d. Assume for this part that each company is a candidate for a potential leveraged buy- out. The buyers intend to implement a capital structure that has 75 percent debt (with a pretax borrowing cost of 8.0 percent) and 25 percent common equity. Project the weighted average cost of capital for each company based on the new capi- tal structure. To what extent do these revised weighted average costs of capital differ from those computed in Part b? View less » Dec 08 2015 04:22 PM
