Estimate the cost of capital for luxotica inc

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Reference no: EM133430445

Question: Luxotica Ino. manufactures and retails eyewear. The firm reported 50 million in after-tax operating income on revenues of $500 million in the most recent year. The company has 50 million shares outstanding, trading at $8 pershare$150 million indebt at a vield to maturityof%and10 million executive options outstanding, which have a market value $14 each; the corporate tax rate is 40%. The firm also has a cash balance of $50 million.

Luxotica had capital expenditures of$80 million and depreciation of $40 million in the most recent year. The stock trades at 1.6 times the book value (of equity), and debt trades at book value (of debt). The unleveled beta for eyewear firms is 0.80; the risk-free rate is 5%, and the market risk premium is 4%.

A. Estimate the cost of capital for Luxotica Inc.

B. IfLuxotica has no working capital investments and expects to maintain its existing reinvestment rate and return on capital for the next 3years, estimate the expected annual growth rate for
this period.

C. Estimate the value ofLuxotica at the end of the third year, assuming that its growth rate drops to 4% after year3and it maintains its existing return on capital and cost of capital.

D. Estimate the value of equity per share.

Reference no: EM133430445

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