Ethier Enterprise has an unlevered beta of 1.3. Ethier is financed with 40% debt and has a levered beta of 1.7

Premium for Financial Risk

Ethier Enterprise has an unlevered beta of 1.3. Ethier is financed with 40% debt and has a levered beta of 1.7. If the risk free rate is 4% and the market risk premium is 6%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.

Solutions

Expert Solution

Expected return = risk free rate + beta * market risk premium

without debt

required return = 4% + 1.3 * 6%

= 11.8%

with debt

required return = 4% + 1.7 * 6%

= 14.2%

additional premium = 14.2% - 11.8%

= 2.4%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Ethier Enterprise has an unlevered beta of 1.15. Ethier is financed with 45% debt and has...

Ethier Enterprise has an unlevered beta of 1.15. Ethier is financed with 45% debt and has a levered beta of 1.35. If the risk free rate is 4% and the market risk premium is 5%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.

Ethier Enterprise has an unlevered beta of 1.15. Ethier is financed with 35% debt and has...

Ethier Enterprise has an unlevered beta of 1.15. Ethier is financed with 35% debt and has a levered beta of 1.35. If the risk free rate is 6% and the market risk premium is 4%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.

Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with...

Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 40% debt and has a levered beta of 1.4. If the risk free rate is 5.5% and the market risk premium is 4%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to one decimal place. %

Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.25. Ethier is financed with...

Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.25. Ethier is financed with 55% debt and has a levered beta of 1.75. If the risk free rate is 6% and the market risk premium is 6%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places. %

Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt...

Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 25%. What would Bailey's beta be if it used no debt, i.e., what is its unlevered beta?

For a levered firm, firm’s assets are financed by equity and debt. That is, ?? =...

For a levered firm, firm’s assets are financed by equity and debt. That is, ?? = ?? + ?? , where ?? ,?? & ?? represents asset value, debt value and equity value at time ?. Suppose the firm makes no dividend payment and has a zero-coupon debt maturing at time ?. At maturity, if the value of the company asset is greater than the maturity value of the debt (?? > ??), the company will simply pay off the...

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%

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 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...

Subjects