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.

Solutions

Expert Solution

Unlevered Firm:

Risk-free Rate = 4.00%
Unlevered Beta = 1.15
Market Risk Premium = 5.00%

Unlevered Required Return = Risk-free Rate + Unlevered Beta * Market Risk Premium
Unlevered Required Return = 4.00% + 1.15 * 5.00%
Unlevered Required Return = 9.75%

Levered Firm:

Risk-free Rate = 4.00%
Levered Beta = 1.35
Market Risk Premium = 5.00%

Levered Required Return = Risk-free Rate + Levered Beta * Market Risk Premium
Levered Required Return = 4.00% + 1.35 * 5.00%
Levered Required Return = 10.75%

Additional Premium = Levered Required Return - Unlevered Required Return
Additional Premium = 10.75% - 9.75%
Additional Premium = 1.00%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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.

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 RiskEthier 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.%

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. %

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%

Company A has a beta of 0.70, while Company B's beta is 1.15. The required return...

Company A has a beta of 0.70, while Company B's beta is 1.15. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

A company has 14 million shares of common stock outstanding with a beta of 1.15 and...

A company has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $45 a share. There are 1000000 shares of 9 percent preferred stock outstanding valued at $80 a share. The 10 percent semi annual coupon bonds have a face value of $1000 and are selling at 92 percent of par. There are 280,000 bonds outstanding that mature in 15 years. The market risk premium is 12 percent., T-bills are yielding 4.5...

A company has 14 million shares of common stock outstanding with a beta of 1.15 and...

A company has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $45 a share. There are 1,000,000 shares of 9 percent preferred stock outstanding valued at $80 a share. The 10 percent semiannual coupon bonds have a face value of $1,000 and are selling at 92 percent of par. There are 280,000 bonds outstanding that mature in 15 years. The market risk premium is 12 percent, T-bills are yielding 4.5 percent,...

You have been managing a $10 million portfolio that has a beta of 1.15 and a...

You have been managing a $10 million portfolio that has a beta of 1.15 and a required rate of return of 5.75%. The current risk-free rate is 2%. Assume that you received another $1.5 million. If you invest the money in a stock with beta of 0.85, what will be the required rate of return on your $11.5 million portfolio? please use excel for your answer.

Using CAPM A stock has a beta of 1.15 and an expected return of 11.4 percent....

Using CAPM A stock has a beta of 1.15 and an expected return of 11.4 percent. A risk-free asset currently earns 3.5 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .7, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta? d. If a...

Subjects