Caliber's Burgers and Fries is a rapidly expanding chain of fast-food restaurants, and the firm's management wants to estimate the cost of equity for the firm. As a frim approximation, the firm plans to use the beta for McDonalds Corporation (MCD), which equals .56, as a proxy for its beta. In addition, Caliber's financial analyst looked up the current yield on ten-year US Treasure bonds and found that it was 4.2%. The final piece of information needed to estimate the cost of equity using the capital asset pricing model is the market risk premium, which is estimated to be 5%.
a. Estimate the cost of equity for Caliber's using the CAPM and McDonalds Corporation's beta.
b. Mcdonalds Corporation has an enterprise value of about $80 billion and a debt of $15 billion. If caliber's had no debt financing, what is your estimate of Caliber's beta coefficient? You can assume that McDonalds' debt has a beta of .20.