Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.70 %, the company's credit risk premium is 4.10%, the domestic beta is estimated at 1.13, the international beta is estimated at 0.96, and the company's capital structure is now 65% debt. The expected rate of return on the market portfolio held by a well-diversified domestic investor is 9.10% and the expected return on a larger globally integrated equity market portfolio is 8.20 %. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 8.10% and the company's effective tax rate is 35%. For both the domestic CAPM and ICAPM, calculate the following: a. Ganado's cost of equity b. Ganado's after-tax cost of debt

a. Ganado's cost of equity for the domestic CAPM is 9.802% and ICAPM is 8.02%

b. Ganado's after-tax cost of debt for the domestic CAPM is 5.265% and ICAPM is 5.265%

Explanation:

a. In order to calculate for both, the domestic CAPM and ICAPM Ganado's cost of equity we would have to make the following calculation:

for the domestic CAPM

cost of equity=risk free+domestic beat(domestic market rate-risk free rate)

cost of equity=3.70%+1.13(9.10%-3.70%)

cost of equity=3.70%+6.102%

cost of equity=9.802%

for ICAPM

cost of equity=risk free+international beat(international market rate-risk free rate)

cost of equity=3.70%+0.96(8.20%-3.70%)

cost of equity=3.70%+4.32%

cost of equity=8.02%

b. In order to calculate for both, the domestic CAPM and ICAPM Ganado's after-tax cost of debt we would have to make the following calculation:

for the domestic CAPM

after-tax cost of debt=8.10%(1-35%)

after-tax cost of debt=5.265%

for ICAPM

after-tax cost of debt=8.10%(1-35%)

after-tax cost of debt=5.265%

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