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:

Peptide Bonds

The chemical bonds formed between the carboxyl group of one amino acid and the amino group of another, linking them together in a protein or peptide chain.

Amide Linkages

Chemical bonds formed by the reaction between the carbonyl group of an acid and the amino group of an amine, characteristic of polymers like nylon and proteins.

Indole Ring

A bicyclic structure composed of a benzene ring fused to a five-membered nitrogen-containing pyrrole ring, found in many organic compounds.

Side Chain

A group of atoms attached to the main part of a molecule, influencing its chemical properties and reactions.