You are analyzing Tiffany Corp, an upscale retailer. The regression estimate of
ID: 2613726 • Letter: Y
Question
You are analyzing Tiffany Corp, an upscale retailer. The regression estimate of the firm's beta is 0.75. Standard error of beta estimate is 0.50. The average unlevered beta of comparable specialty retailing firms is 1.15. Tiffany has a Debt-Equity ratio of 20%. Its tax rate is 40%. a) Estimate a range for the beta from the regression. Tiffany is rated BBB.The Default Spread for BBB-rated firms is 1% over Treasury Bond rate.Treasury Bond rate is 6.5%.Assume an Equity Risk Premium of 5.5%. b) Estimate the Cost of Capital of the firm.
Explanation / Answer
Answer:a Range for beta from regression
With one standard error : 0.25 - 1.25
Answer:b)
Unlevered Beta of comparable firms = 1.15
Beta for Tiffany's based on comparable firms = 1.15 (1+0.6*.2) = 1.29
Cost of capital of the firm=Rf+Beta*Market risk premium
=6.5%+1.29*5.5%
=13.595%
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