Reference no: EM132956893
Question - GM's Italian subsidiary launched its initial public offering (IPO) on October 20, 2017. Although the share price had initially risen to over 57 per share, by the end of the year it had settled to 49.50. DiMaria had never calculated cost of capital since joined GM. One of DiMaria's first challenges was estimating its beta. Feldstein provided the following market data for DiMaria to determine GM's new European subsidiary Weighted Average cost of Capital (WACC).
Exhibit 3
Italian risk-free cost of debt in euros (€): 4.00%
Subsidiary's cost of debt in euros (€): 5.00%
Italian corporate income tax rate: 30.00%
Correlation between Subsidiary and the market: 0.65
Standard deviation of the return on subsidiary: 12.50%
Standard deviation of the market return: 7.00%
Italian equity market risk premium (equity return over risk-free): 6.00%
Subsidiary's shares outstanding: 195,000,000
Subsidiary's share price in euros: € 49.50
Subsidiary's debt outstanding in euros: € 500,000,000
Using the information in Exhibit 3, calculate GM Italian subsidiary's beta and cost of equity in euro.
A. Beta and cost of equity are 1.16 and 10.96%, respectively.
B. Beta and cost of equity are 1.1 and 10.50%, respectively.
C. Beta and cost of equity are 0.95 and 8.95%, respectively.
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