The equity beta for Amen Corn Organics is 0.72. They have a capital structure that has...

The equity beta for Amen Corn Organics is 0.72. They have a capital structure that has a total debt ratio of 0.36, and they face a 18% marginal tax rate. The risk-free rate is 2.5% on T-Bills and 2.8% on T-Bonds. Assuming 5% and 7% market-risk premiums, what is an appropriate levered cost of equity capital?

Expert Solution

Unlevered beta	Levered Beta/(1+(1-t)*(D/E))

Unlevered beta	0.72/(1+(1-18%)*.36/.64)

Unlevered beta	0.49

Avg Risk free rate	2.65%	(2.5%+2.8%)/2

Market risk premium	6.00%	(5%+7%)/2

Equity cost	5.61%

Separately working out

Unlevered beta	0.49	0.49
Risk free rate	2.50%	2.80%
Risk premium	5.00%	7.00%
Equity cost	4.95%	6.23%

jeff jeffy answered 1 year ago

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