An analyst estimates the cost of debt capital for ABT is 3% and that its cost of equity capital is 5%. Assume that ABT’s statutory tax rate is 37%, the risk-free rate is 2.5%, the market risk premium is 5%. the ABT market price is $65.6 per common share, and its dividends are $0.88 per common share.
An analyst estimates the cost of debt capital for ABT is 3% and that
its cost of equity capital is 5%. Assume that ABT’s statutory tax rate is 37%, the risk-free rate is 2.5%, the market risk premium is 5%. the ABT market price is $65.6 per common share, and its dividends are $0.88 per common share.
a. Compute aABT’s average pretax borrowing rate and its market beta.
b. Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model and the market price to infer the market’s expected cost of equity capital.
c. Compare the inferred cost of equity capital from part b to the 5% estimated cost of equity capital from the analyst. Comment on any difference
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