Watson Manufactures and Sells Appliances Required
A

Essay

Watson manufactures and sells appliances. Intro develops and manufactures computer technology. Trenton operates general merchandise retail stores. Selected data for these companies appear in the following table (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value.
$\begin{array}{|l|l|l|l|}\hline \$ \text { amounts in millions) } & \text { Watson } & \text { Intro } & \text { Trenton } \\\hline \text { Total Assets } & \$ 13,532 & \$ 109,524 & \$ 44,106 \\\hline \text { Interest-Bearing Debt } & \$ 2,597 & \$ 33,925 & \$ 18,752 \\\hline \text { Average Pretax Borrowing Cost } & 6.1 \% & 4.3 \% & 4.9 \% \\\hline \text { Comunon Equity: } & & & \\\hline \text { Book Value } & \$ 3,006 & \$ 13,465 & \$ 13,712 \\\hline \text { Market Value } & \$ 2,959 & \$ 110,984 & \$ 22,521 \\\hline \text { Income Tax Rate } & 35,0 \% & 35.0 \% & 35,0 \% \\\hline \text { Market Equity Beta } & 2.27 & 0.78 & 1.2 \\\hline & & & \\\hline\end{array}$ Required
a. Assume that the intermediate-term yields on U.S. Treasury securities
are roughly 3.5 percent. Assume that the market risk premium is 5.0 percent.
Compute the cost of equity capital for each of the three companies.
b. Compute the weighted average cost of capital for each of the three companies.
c. Compute the unlevered market (asset) beta for each of the three companies.