Due to COVID-19, Kering Group (with famous brands such as Gucci, and Balenciaga) plans to manufacture face masks and keep the business in the future 5 years. The first-aid product firms have a cost of capital of 8.5%.
The capital information of both firms is shown as follows:
(1) Please make a comparison of Cost of Capital in Kering based on CAPM and continuous dividend growth model.
(2) Please estimate whether the Face mask business can bring positive value to Kering group
(3) If you were CFO of Kering in 2013, you plan to acquire a jewellery brand Qeelin and control for the operation of the brand after the acquisition transaction. Please state your estimation plan on choosing the cost of capital for evaluation of the business.
Kering Face mask business Beta 0.90 Investment on Face mask 325 plant (Mil) Debt Yield -2.78% Free cash flow (Mil) 123 Shares outstanding (Mil.) 126.3 Market Capital of Equity (Mil.) 68220000 Debt-to-Asset (Market value) 36% BTF (1-yr Treasury bill of France) 2% Paris exchange index (6months) -1.6% Corporate tax 28% Dividend 5 Growth rate of dividend 3%
Capital Asset Pricing Model CAPM A capital investment below the security market wouldn' t be efficiently priced to the buyer of the investment. A higher return or lower price would be required, both increasing the cost of capital.
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