Watson Manufactures and Sells Appliances Required
A

question 40

Essay

Watson manufactures and sells appliances. Intro develops and manufactures computer technology. Trenton operates general merchandise retail stores. Selected data for these companies appear in the following table (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value.
$\begin{array}{|l|l|l|l|}\hline \$ \text { amounts in millions) } & \text { Watson } & \text { Intro } & \text { Trenton } \\\hline \text { Total Assets } & \$ 13,532 & \$ 109,524 & \$ 44,106 \\\hline \text { Interest-Bearing Debt } & \$ 2,597 & \$ 33,925 & \$ 18,752 \\\hline \text { Average Pretax Borrowing Cost } & 6.1 \% & 4.3 \% & 4.9 \% \\\hline \text { Comunon Equity: } & & & \\\hline \text { Book Value } & \$ 3,006 & \$ 13,465 & \$ 13,712 \\\hline \text { Market Value } & \$ 2,959 & \$ 110,984 & \$ 22,521 \\\hline \text { Income Tax Rate } & 35,0 \% & 35.0 \% & 35,0 \% \\\hline \text { Market Equity Beta } & 2.27 & 0.78 & 1.2 \\\hline & & & \\\hline\end{array}$ Required
a. Assume that the intermediate-term yields on U.S. Treasury securities
are roughly 3.5 percent. Assume that the market risk premium is 5.0 percent.
Compute the cost of equity capital for each of the three companies.
b. Compute the weighted average cost of capital for each of the three companies.
c. Compute the unlevered market (asset) beta for each of the three companies.

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Definitions:

Regression Analysis

A statistical method for examining the relationship between a dependent variable and one or more independent variables.

Least Squares Line

The least squares line refers to the line of best fit in linear regression, minimizing the sum of the squared differences between observed and predicted values.

Predicted Amount

The estimated value of a variable or outcome according to a model or predictor variable(s).

Residuals

The differences between observed and predicted values of data, used in statistical models to analyze the goodness of fit.