Question

Question text Estimating Components of both WACC and DDM Analysts estimate the cost of debt capital for Abbott Laboratories (NYSE: ABT) is 2.42% and that its cost of equity capital is 4.1%. Assume that ABT's marginal tax rate is 36%, the risk-free rate is 4.6%, the market risk premium is 5.0%, the ABT market price is $47.73 per common share, and its dividends are $1.09 per common share.

(a) Compute ABT's average borrowing rate and its market beta. (Round your answers to one decimal place.)

Average borrowing rate =

Market beta =

(b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)

Answer 1

Given Information or (a) Cost of debt capital = 2.46%. Marginal Tax Rate = 36% or 0.36 D Here, the cost of debt capital is the after tax cost of debt and we have to calculate average borrowing rate The formula for that is Average Borrowing Rate = cost of Debt Capital 1. C1-tax Rate) = 2.42) I-0.36 = 2.42.). 0.64 = 3.781254 . or 3.8% (approx) 1 Now, we will calculate Market Beta. Cost of Equity capital = 4.10%

Risk-free Rate = 4.6% Market Risk Premium - 5.0% As per Capital Asset Pricing Model, Cost of Equity Capital = Risk - foer Rate + Beta | Market Risk Premium] 4.14%. = 4.664 + Beta (540) 4.11. - 4.6% = 54. Beta -0.54. - (540) Beta -0.5% = Beta 5% - Ool a Beta so the market beta is -0.1 b) Market Price of share= $47.73 per share 1 Dividend = $1.09 per share Dividends are to be paid at cessent level in perpetuity. So, we use constant perpetuity discount model to calculate cost of equity capital.

As per Price the model, = Dividend Cost of Equity capital $ 47.73 = - $1.09 cost of Equity capital cost of equity Capital = $1.09 $47.73 = 0.0228 368 00 2.28368 % or 2.34. Сафрод