Question

In: Accounting

Levered Equity Beta D/E Ratio Debt Beta A company 3.24 205.16% 0.3 B company 4.05 5663.67%...

Levered Equity Beta D/E Ratio Debt Beta
A company 3.24 205.16% 0.3
B company 4.05 5663.67% 0.4
C company -0.11 106.22% 0.3
Southwest Airlines -0.01 14.93% 0.2

1. Estimate the unlevered equity beta for Southwest Airlines. You may assume a 38% tax rate in your calculations.

2. Based on your estimate of Southwest Airlines’ unlevered equity beta, relever the beta to get an estimate of the firm’s levered beta.

3. The airline industry was obviously in a very unique position at the end of 2006. Are there any special concerns that you have regarding the estimation of the cost of equity for Southwest Airlines using the procedure described here?

Solutions

Expert Solution

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Levered Equity Beta D/E Ratio Debt Beta A company 3.24 205.16% 0.3 B company 4.05 5663.67%...
Levered Equity Beta D/E Ratio Debt Beta A company 3.24 205.16% 0.3 B company 4.05 5663.67% 0.4 C company -0.11 106.22% 0.3 Southwest Airlines -0.01 14.93% 0.2 1. Estimate the unlevered equity beta for Southwest Airlines. You may assume a 38% tax rate in your calculations. 2. Based on your estimate of Southwest Airlines’ unlevered equity beta, relever the beta to get an estimate of the firm’s levered beta. 3. The airline industry was obviously in a very unique position...
Levered Equity Beta D/E Ratio Debt Beta A company 3.24 205.16% 0.3 B company 4.05 5663.67%...
Levered Equity Beta D/E Ratio Debt Beta A company 3.24 205.16% 0.3 B company 4.05 5663.67% 0.4 C company -0.11 106.22% 0.3 Southwest Airlines -0.01 14.93% 0.2 1. Estimate the unlevered equity beta for Southwest Airlines. You may assume a 38% tax rate in your calculations. 2. Based on your estimate of Southwest Airlines’ unlevered equity beta, relever the beta to get an estimate of the firm’s levered beta. 3. The airline industry was obviously in a very unique position...
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%
The beta of the equity of CDE Company is 1.67 and CDE has a debt-to-equity ratio...
The beta of the equity of CDE Company is 1.67 and CDE has a debt-to-equity ratio of 0.67 calculated at market values. The debt is risk-free and perpetual. CDE generates annual EBIT of $100 and has 100 shares of common stock outstanding. The expected return on the market portfolio is 15% and the risk-free interest rate is 5%. The corporate tax rate is 30%. Assume that personal taxes and bankruptcy costs are not relevant. 1. Compute the current market value...
A company has a capital structure which is based on a debt-equity (D/E) ratio of 2/3....
A company has a capital structure which is based on a debt-equity (D/E) ratio of 2/3. The after-tax cost of debt is 6.50 percent and the cost of common stock is 16.50 percent. GEC is considering a project that is equally as risky as the overall firm. The project requires an initial investment of $400,000 and will generate after-tax cash flows of $125,000 a year for five years. What is the projected net present value (NPV) of this project? Select...
A semiconductor company has an equity beta of 1.8, a debt-to-equity ratio of 0.05, an average...
A semiconductor company has an equity beta of 1.8, a debt-to-equity ratio of 0.05, an average cost of debt of 6.0% p.a., and an effective income tax rate of 12%. The current rate on long-term U.S. government Treasury Bills is 2.2% p.a. The market risk premium (R M -R F ) pertaining to a diversified portfolio of corporate common stock is about 8.4% p.a. Estimate this company’s cost of equity and its weighted average cost of capital. If the company...
Based on the following information, please estimate the bottom-up beta for HPQ. Levered Beta D/E Tax...
Based on the following information, please estimate the bottom-up beta for HPQ. Levered Beta D/E Tax Rate High Tech Sector 1.32 35.11% 27% HPQ 46.30% 24.06%
EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T) debt-equity ratio)...
EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T) debt-equity ratio) The asset beta for a particular industry is 0.75. Use Equation 9.6 to estimate the equity betas for the following three firms based on their respective debt ratios and tax rates. Then calculate each firm's cost of equity assuming an expected market premium of 6% and a risk-free rate of 4%. Firm A: 75% debt ratio and 35% tax rate Firm B: 20% debt...
A company has a debt-to-equity ratio of 1/4 in terms of market values. Its equity beta...
A company has a debt-to-equity ratio of 1/4 in terms of market values. Its equity beta is 1.15 and its cost of debt is 3.5%. Its tax rate is expected to be 20%. Assume the risk-free rate of 3% and the market risk premium of 7%. What is its weighted average cost of capital (WACC)?
A firm has a debt-to-equity ratio of 50%. The firm’s equity beta is 1.5 and the...
A firm has a debt-to-equity ratio of 50%. The firm’s equity beta is 1.5 and the cost of debt is 6%. Assume the market risk premium is 6%, the 10-year Treasury bond yield is 3%, and the corporate income tax rate is 40%. Estimate the firm’s WACC. Estimate the firm’s unlevered cost of equity, ku. (Hint: Since the debt ratio is constant, you can assume ktax = ku. Use Equation 3c2.) If the firm plans to increase the debt-to-equity ratio...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT