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Compute abts average pretax borrowing rate

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Problem - An analyst estimates the cost of debt capital for ABT is 3% and that it's cost of equity capital is 5%. Assume that ABT's statutory tax rate is 37%, the risk-free rate is 2.5%, and the market risk premium is 5%. The ABT market price is $65.6 per common share, and its dividends are $0.88 per common share.

Required -

a. Compute ABT's average pretax borrowing rate and its market beta.

b. Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model and the market price to infer the market's expected cost of equity capital.

c. Compare the inferred cost of equity capital from part b to the 5% estimated cost of equity capital from the analyst. Comment on any difference.

Reference no: EM132452340

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