1. Ganado and Equity Risk Premiums. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.70%, the company's credit risk premium is 4.10%, the domestic beta is estimated at 1.01, the international beta is estimated at 0.68, and the company's capital structure is now 30 % debt. The before-tax cost of debt estimated by observing the current yield on? Ganado's outstanding bonds combined with bank debt is 8.10 % and the company's effective tax rate is 39 %. Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates.
a. 8.10%
b. 7.20%
c. 5.20%
d. 4.10%
2. Would expect that, all else being equal, investors will pay less for stock that they view is having become more risky. Assume a stock has just paid a two dollar per share dividend. And less believe that future dividends will grow at a 14% rate. The constant dividend growth rate is 4% what would the stock price be?
A $14.29
B $20
C $20.80
D $28.57