How should the company finance future projects

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Reference no: EM131576121

You have been asked to estimate the cost of capital of Luluemon. (LULU). The folowing information is provided:

The beta of the stock is -0.16, based upon the regression LULU stock returns against the S&P 500 index.

The share price is $48.67, and there are 127.33 million shares outstanding.

The firm has zero debt on its balance sheet. Luluemon incurs a marginal corporate tax rate 38%.

The firm is rated AAA by the rating agencies, and default spread for A-rated 10 year bonds is currently 6 basis points over corresponding US treasury yield.

If the 10 year Treasury currently yields about 2.19%, and the expected lon-term return on the broad stock market is about 7%.

Problems:

a. What is the cost of equity for Lulemon Inc.

b. How much does the firm currently pay on debt?

c. What is the estimated cost of capital for the company?

d. Based on the firm's financials how should the company finance future projects?

Reference no: EM131576121

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