Estimate the cost of equity

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Reference no: EM13875898

Caballos, Inc., has a debt to capital ratio of 27%, a beta of 1.26 and a pre-tax cost of debt of 6.8%. The firm had earnings before interest and taxes of $ 515 million for the last fiscal year, after depreciation charges of $ 292 million. The firm had capital expenditures of $ 391 million, and non-cash working capital increased by $ 68 million. The firm also had a book value of capital of $ 2.1 billion at the beginning of the last fiscal year. (The Treasury bond rate is 3.2 %, the market risk premium is 6.6 % and the firm has a tax rate of 40 %). Assume that the firm is in stable growth, and that the return on capital and reinvestment rates for the last fiscal year can be sustained forever. Estimate the Cost of Equity.

Reference no: EM13875898

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