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In: Finance

You’ve been monitoring Bletchley Park Corporation and have calculated the following information. The company has a...

You’ve been monitoring Bletchley Park Corporation and have calculated the following information. The company has a debt to asset ratio of 57.45%, market beta of 1.26, unlevered beta of .82 (at a 40% marginal tax rate), and a cost of equity of 13.67%. The risk free rate is 1.8%. The risk premium due to financial risk is closest to?

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Answer:

Given data: Debt to asset ratio = 57.45%

                  Market beta = 1.26

                  Unlevered bata = 0.82

                  Cost of equity = 13.67%

                   Risk free rate = 1.8%

Market risk Premium can be straight calculated by using Capital asset pricing model theory;

formula : Cost of equity = Risk free rate + Market beta * Market risk premium

             13.67% = 1.8% + 1.26 * risk premium

             0.1367 = 0.018 + 1.26 * risk premium

              0.1187 = 1.26 * risk premium

              Risk premium = 0.1187 / 1.26 = 0.094206 = 0.094 = 9.42%.

So market risk premium is 9.42%.

jeff jeffy answered 2 years ago
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