Calculate the cost of equity for the two firms

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Reference no: EM13160082

There are two firms that have historically competed in the ice cream industry - Firm A and Firm B. Calculate the cost of capital for each of the firms with the information given below:

	Firm A	Firm B
Cost of Debt	4%	4%
Cost of Equity	See below	See below
Risk Free Rate	3%	3%
Beta	1.3	1.3
Market Rate	11%	11%
Weight of Debt	40%	60%
Weight of Equity	60%	40%
Tax rate	35%	35%

Calculate the cost of equity for the two firms (note: they will be the same)

Calculate the corporate cost of capital for the two firms (note: they will be different)

What does the difference in the CCC%u2019s tell us about the riskiness of the two firms? Why is that the case?

If the expected industry return is 8%, will both firms stay in the industry?

If the CCC for each firm remains the same, what should the expected return of the industry eventually approach? Why?

Reference no: EM13160082

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