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.

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Expert Solution

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%

jeff jeffy answered 1 year ago

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