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Target: Estimate the cost of equity, WACC, and unlevered cost of equity.

Estimate the cost of equity, WACC, and unlevered cost of equity.

Using Target as the company you have been studying thus far.

Find the beta for your company use: http://finance.yahoo.com/q/ks?s=AIG

Estimate your company's cost of equity.
Estimate your company's weighted-average cost of capital.
Estimate your company's unlevered cost of equity.
Show your calculations in an Excel document.
Be sure to label each calculation clearly

Solution Preview

Basics of cost of capital

The cost of capital is the required rate of return that a firm must achieve in order to cover the cost of generating funds in the marketplace. Another way to think of the cost of capital is as the opportunity cost of funds, since this represents the opportunity cost for investing in assets with the same risk as the firm. When investors are shopping for places in which to invest their funds, they have an opportunity cost. The firm, given its riskiness, must strive to earn the investor's opportunity cost. If the firm does not achieve the return investors expect (i.e. the investor's opportunity cost), investors will not invest in the firm's debt and equity. As a result, the firm's value (both their debt and equity) will decline.

Based on their evaluations of the riskiness of ...

Solution Summary

About 400 words of comments and computations in excel.

$2.19