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