FINANCE 770 – Whirlpool IBM Target Stores Total Assets

FINANCE 770 – Whirlpool IBM Target Stores Total Assets

Subject: Business    / Finance
Question

Whirlpool IBM Target Stores Total Assets
Interest-Bearing Debt
Average Pretax Borrowing Cost $13,532
$ 2,597
6.1% $109,524
$ 33,925
4.3% $44,106
$18,752
4.9% Common Equity: Book Value
Market Value
Income Tax Rate
Market Equity Beta $ 3,006
$ 2,959
35.0%
2.27 $ 13,465
$110,984
35.0%
0.78 $13,712
$22,521
35.0%
1.20 Required
a.
b.
c.
d. 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.
Compute the weighted average cost of capital for each of the three companies.
Compute the unlevered market (asset) beta for each of the three companies.
Assume for this part that each company is a candidate for a potential leveraged buyout. 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
capital structure. To what extent do these revised weighted average costs of capital differ from those
computed in Part b?

Have to show calculations.