You’re working as a financial analyst for Dillard’s Inc (NYSE: DDS). Your boss wants to open a slew of department stores in New York and New England, and has asked you to estimate the appropriate cost of capital to use when evaluating this project.
1. Estimate the equity beta of Dillard’s Inc using OLS regression and the market model.
2. Identify other companies in the industry that should be of similar risk to the project and find their betas.
3. Adjust the comparable betas, if necessary, for capital structure differences and take the median adjusted beta.
4. Which beta should you use to evaluate the project? (i.e. From question 1 or question 3) Why?
5. Estimate the WACC for the project.
1. Estimate the equity beta of Dillard’s Inc using OLS regression and the market model.
2. Identify other companies in the industry that should be of similar risk to the project and find their betas.
3. Adjust the comparable betas, if necessary, for capital structure differences and take the median adjusted beta.
4. Which beta should you use to evaluate the project? (i.e. From question 1 or question 3) Why?
5. Estimate the WACC for the project.