Watson Manufactures and Sells Appliances Required
A

question 34

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.
$\begin{array} { | l | r | r | r| } \hline ( \$ \text { amounts in millians) } & \text { Watsan } & \text { Intra } & \text { Trentan } \\\hline \text { Total Assets } & \$ 13,532 & \$ 109,524 & \$ 44,106 \\\hline \text { Interest-Bearing Debt } & \$ 2,597 & \$ 33,925 & \$ 18,752 \\\hline \text { Average Pretar Barrowing Cost } & 6.1 \% & 4.3 \% & 4.9 \% \\\hline \text { Cammon Equity: } & & & \\\hline \text { Book Value } & \$ 3,006 & \$ 13,465 & \$ 13,712 \\\hline \text { Market Value } & \$ 2,959 & \$ 110,984 & \$ 22,521 \\\hline \text { Income Tax Rate } & 35.0 \% & 35.0 \% & 35.0 \% \\\hline \text { Market Equity Beta } & 2.27 & 0.7 & 1.2 \\\hline\end{array}$
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:

Sampling Procedure

The method or process used to select a sample from a population for statistical analysis.

Confidence Interval

A grouping of values from sample statistics, thought to potentially envelop the value of an unknown population feature.

Population Proportion

The ratio of members in a subgroup of a population to the total population, expressed as a fraction or percentage.

Confidence Coefficient

The probability level, expressed as a percentage, that the confidence interval actually includes the true parameter value.