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(Version 1) Abercrombie & Fitch, Inc. is attempting to estimate the cost of capital for...

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Finance

(Version 1) Abercrombie & Fitch, Inc. is attempting to estimate the cost of capital for use in analyzing a proposed expansion into jewelry products. The firm hires you to help them compute the cost of capital. You have collected the following data from Bloomberg for jewelry companies:

Pure Players E D/(E+D) Bonding Rating
Tiffany & Co. 2.00 20% BB
Signet Jewelers Ltd. 1.90 15% BB
Zales 1.80 10% BB

Abercrombie targets a debt-to-value ratio of 25% and has a bond rating of BB and a E of 1.00 for current operations.

You estimate that the market risk premium (rM-rf) is 7 percent, the risk-free rate is 1%, and the marginal tax rate for all firms is 40%. Assume the beta on debt rated BB is 0.17.

a. Calculate its after-tax weighted-average cost of capital for Abercrombies current operations.

b. Calculate the unlevered beta for each pure player and estimate the unlevered beta in the jewelry industry by averaging your estimates for the pure players. Recall the formula:

= + + +

Calculate the after-tax weighted-average cost of capital appropriate for Abercrombies proposed expansion into jewelry. Recall the formula:

=

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