Question
In: Finance
The beta of an all equity firm is 1.6. The beta of debt is 0.2.If the...
The beta of an all equity firm is 1.6. The beta of debt is 0.2.If the firm changes its capital structure to 60% debt and 40% equity using 10% debt financing, what will be the beta of the levered firm? (Assume no taxes.)
A. 4.0
B. 3.7
C. 3.4
D. 2.8
Solutions
Expert Solution
Beta Levered = Beta unlevered + (Beta unlevered - Beta debt) * D/E = 1.6 + (1.6-0.2)* 60/40 = 3.7
Answer is B. 3.7
jeff jeffy answered 2 years agoRelated Solutions
The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2....
The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt
has a beta of 0.2. Its debt/equity (D/E) ratio is 0.3. The Johnson
Corporation's equity has a beta of 2. The company has zero beta
debt, and its debt/equity ratio is 0.5. The risk free rate is 8%,
and the expected return on the market portfolio is 19%. There are
no taxes.
(a) The Johnson Corporation is thinking of investing in the same
line of business that OkaCocoa is...
A firm has a debt-to-equity ratio of 50%. The firm’s equity beta is 1.5 and the...
A firm has a debt-to-equity ratio of 50%. The firm’s equity beta
is 1.5 and the cost of debt is 6%. Assume the market risk premium
is 6%, the 10-year Treasury bond yield is 3%, and the corporate
income tax rate is 40%.
Estimate the firm’s WACC.
Estimate the firm’s unlevered cost of equity,
ku. (Hint: Since the debt ratio is constant,
you can assume ktax = ku.
Use Equation 3c2.)
If the firm plans to increase the debt-to-equity ratio...
A firm is financed with debt that has a market beta of 0.3 and equity that...
A firm is financed with debt that has a market beta of 0.3 and
equity that has a market beta of 1.2. The risk-free rate is 3%, and
the equity premium is 5%. The overall cost of capital for the firm
is 8%. What is the firmʹs debt-equity ratio?
a) 28.6%
b) 25.0%
c) 74.8%
d) 25.2%
Ohio Inc. has a global beta of 1.6 and its debt-to-equity ratio is 0.6. The risk-free...
Ohio Inc. has a global beta of 1.6 and its debt-to-equity ratio
is 0.6. The risk-free rate is 3.2% and the expected global market
risk premium is 9%. Although Ohio is a US firm, it issued Swiss
Franc (SF) denominated bond and converted SF to US dollar. The
semi-annual interest payment is made in SF. The coupon rate is 8%,
the price of the bond is SF1020, the face value is SF1,000, and
the bond matures in 15 years. The...
Ohio Inc. has a beta of 1.6 and its debt-to-equity ratio is 0.8. The risk-free rate...
Ohio Inc. has a beta of 1.6 and its debt-to-equity ratio is 0.8.
The risk-free rate is 3.2% and the market risk premium is 9%.
Although Ohio is a U.S. firm, it issued Swiss Franc (SF)
denominated bond and converted SF to US dollar. The semi-annual
interest payment is made in SF. The coupon rate is 8%, the price of
the bond is SF1,040, the face value is SF1,000 and the bond matures
in 10 years. The exchange rate is...
Firm A has a beta of 1.3 and a debt-to-equity ratio of 0.4 and an interest...
Firm A has a beta of 1.3 and a debt-to-equity ratio of 0.4 and
an interest rate of 9% on its debt. It has chosen Firm P as a proxy
for a new line of business it is considering. Firm P has a beta of
1.6 and a debt to equity ratio of 0.8 and the expected return on
the S&P 500 is 12% and the risk-free rate is 5.5%. The marginal
tax rate is 40%.
A. Find the correct...
Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 . It has...
Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7
.
It has deb with a coupon of 8%, face value of $1,000 and
yield-to-maturity of 12%. It has chosen firm P as a proxy company
for a new project it is considering in a totally different line of
business from its present one. Firm P has a beta of 1.6 and
debt-to-equity ratio of 0.4 and a bond with yield-to-maturity of
10%, a coupon of 12%...
Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 . It has...
Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7
.
It has deb with a coupon of 8%, face value of $1,000 and
yield-to-maturity of 12%. It has chosen firm P as a proxy company
for a new project it is considering in a totally different line of
business from its present one. Firm P has a beta of 1.6 and
debt-to-equity ratio of 0.4 and a bond with yield-to-maturity of
10%, a coupon of 12%...
EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T) debt-equity ratio)...
EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T)
debt-equity ratio)
The asset beta for a particular industry is 0.75. Use Equation
9.6 to estimate the equity betas for the following three firms
based on their respective debt ratios and tax rates. Then calculate
each firm's cost of equity assuming an expected market premium of
6% and a risk-free rate of 4%.
Firm A: 75% debt ratio and 35% tax rate
Firm B: 20% debt...
Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost...
Silo Mills is an all-equity financed firm that has a beta of
1.18 and a cost of equity of 12.2 percent. The risk-free rate of
return is 2.9 percent. The firm is currently considering a project
that has a beta of 1.03. What discount rate should be assigned to
this project?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Instructions: Each of the following scenarios illustrates one of Freud’s defense mechanisms from the list below....
- What are the SHDN, LNA in opamp What are the TXCO coding algorithm for binary and...
- Need to program a maze traversal program using dynamic array and stacks. The problem is faced...
- what were some of Ida B Wells significant contributions to the civil rights movement?
- In 2007, there were many people in Sri Lanka who have an opinion that the government...
- Example #2: Write the following set of four linear equations with 4 unknowns x1, x2, x3,...
- "In the digital age, our personal and collective privacy is threatened like it never has been...
ADVERTISEMENT