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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.

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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 2 years ago
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