1. **Problem Statement:** We have two companies, Electrolux and Ferrari, and we need to calculate proportions of capital structure and weighted average cost of capital (WACC) for Electrolux, and various cost and value metrics for Ferrari. --- ### Electrolux Capital Structure 2. **a. Proportion of Electrolux's capital structure that is debt:** - Let $D$ = total debt - Let $E$ = total equity - Total capital = $D + E$ - Proportion of debt = $\frac{D}{D+E}$ 3. **b. Proportion of Electrolux's capital structure that is equity:** - Proportion of equity = $\frac{E}{D+E}$ 4. **c. Electrolux's weighted average cost of capital (WACC):** - Formula: $$\text{WACC} = w_D \times r_D \times (1 - T) + w_E \times r_E$$ where: - $w_D$ = weight of debt = $\frac{D}{D+E}$ - $w_E$ = weight of equity = $\frac{E}{D+E}$ - $r_D$ = cost of debt - $r_E$ = cost of equity - $T$ = corporate tax rate --- ### Ferrari IPO and WACC Given: - Cost of debt before tax $r_D = 3.99\% = 0.0399$ - Tax rate $T = 33.5\% = 0.335$ - Beta $\beta = 0.90$ - Risk-free rate $r_f = 4.00\% = 0.04$ - Market risk premium $\text{MRP} = 5.50\% = 0.055$ - Shares outstanding = 189,000,000 - Share price = 48 - Debt outstanding = 510,000,000 5. **a. Ferrari's after-tax cost of debt:** $$r_D (1 - T) = 0.0399 \times (1 - 0.335) = 0.0399 \times 0.665 = 0.02653 = 2.653\%$$ 6. **b. Ferrari's cost of equity:** Using Capital Asset Pricing Model (CAPM): $$r_E = r_f + \beta \times \text{MRP} = 0.04 + 0.90 \times 0.055 = 0.04 + 0.0495 = 0.0895 = 8.95\%$$ 7. **c. Ferrari's market capitalization:** $$\text{Market Cap} = \text{Shares Outstanding} \times \text{Share Price} = 189,000,000 \times 48 = 9,072,000,000$$ 8. **d. Ferrari's total value of equity:** This is the same as market capitalization: $$9,072,000,000$$ --- **Summary:** - Ferrari's after-tax cost of debt is 2.653%. - Ferrari's cost of equity is 8.95%. - Ferrari's market capitalization and total equity value are 9,072,000,000. --- **Note:** Electrolux's specific debt and equity values and costs are not provided, so proportions and WACC cannot be numerically calculated here.