Question

Analysts estimate the cost of debt capital for Abbott Laboratories (NYSE: ABT) is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT's statutory tax rate is 37%, the risk-free rate is 2.5%, the market risk premium is 5.0%, the ABT market price is $65.60 per common share, and its dividends are $0.88 per common share. (a) Compute ABT's average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Answer 1.3 % Market beta =

Answer 1

Answer:

4.76% and 0.5

Explanation:

The computation is shown below:

Average borrowing rate is

= Cost of debt capital ÷ (1 - tax rate)

= 3% ÷ (1 - 0.37)

= 4.76%

And, the market beta is

Cost of equity = Risk free rate of return + Beta × (Market risk premium - risk free rate of return)

5% = 2.5% + Beta × 5%

So, the beta is 0.5

The (Market risk premium - risk free rate of return) is also known as market risk premium