Suppose that firm A is considering entering a business similar to firm B, a relatively small firm in a single line of business. Firm A is currently financed with 60% debt and 40% equity. Firm B, the pure-play firm, has a B of 0.95 and is financed with 4Ó% debt and 60% equity. Firm B's marginal tax rate is 30% and firm A's marginal tax rate is 25%. Assume the riskless rate is 2% and the market return is 8%. (Show work in excel) What is Firm A's leveraged beta? - What is Firm B's unleveraged beta? - Estimate firm A's cost of equity for the new business using the CAPM. Answer is decimal format. - According to the CAPM, the market risk premium is percent.
Suppose that firm A is considering entering a business similar to firm B, a relatively small firm in a single line of business. Firm A is currently financed with 60% debt and 40% equity. Firm B, the pure-play firm, has a B of 0.95 and is financed with 4Ó% debt and 60% equity. Firm B's marginal tax rate is 30% and firm A's marginal tax rate is 25%. Assume the riskless rate is 2% and the market return is 8%. (Show work in excel) What is Firm A's leveraged beta? - What is Firm B's unleveraged beta? - Estimate firm A's cost of equity for the new business using the CAPM. Answer is decimal format. - According to the CAPM, the market risk premium is percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose that firm A is considering entering a
business similar to firm B, a relatively small
firm in a single line of business. Firm A is
currently financed with 60% debt and 40%
equity. Firm B, the pure-play firm, has a B of
0.95 and is financed with 40% debt and 60%
equity. Firm B's marginal tax rate is 30% and
firm Á's marginal tax rate is 25%. Assume the
riskless rate is 2% and the market return is 8%.
(Show work in excel)
- What is Firm A's leveraged beta?
- What is Firm B's unleveraged beta?
- Estimate firm A's cost of equity for the new
business using the CAPM. Answer is decimal
format.
- According to the CAPM, the market risk
premium is
percent.
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