In: Finance
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.
Unlevered Beta = 1.15
Levered Beta = 1.35
Risk-free Rate = 6.00%
Market Risk Premium = 4.00%
Required Return of Unlevered Firm = Risk-free Rate + Unlevered
Beta * Market Risk Premium
Required Return of Unlevered Firm = 6.00% + 1.15 * 4.00%
Required Return of Unlevered Firm = 10.60%
Required Return of Levered Firm = Risk-free Rate + Levered Beta
* Market Risk Premium
Required Return of Levered Firm = 6.00% + 1.35 * 4.00%
Required Return of Levered Firm = 11.40%
Additional Premium = Required Return of Levered Firm - Required
Return of Unlevered Firm
Additional Premium = 11.40% - 10.60%
Additional Premium = 0.80%