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The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm's debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amount of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms: Company Name Levered Equity Betas Debt/Equity Capitalizatioin Assumed Debt Betas Easman Chemical Co. (EMN) 1.79 30.77% 0.30 Celanese Copr. (CE) 1.98 23.55% 0.30 Dow Chemical Company (DOW) 1.71 21.60% 0.30 a. Use the information given above to estimate the unlevered equity betas for each of the companies. b. If Sterling's debt-to-equity capitalization ratio is .20 and its debt beta is 30, what is your estimate of the firm's levered equity beta?

The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm's debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amount of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms: Company Name Levered Equity Betas Debt/Equity Capitalizatioin Assumed Debt Betas Easman Chemical Co. (EMN) 1.79 30.77% 0.30 Celanese Copr. (CE) 1.98 23.55% 0.30 Dow Chemical Company (DOW) 1.71 21.60% 0.30 a. Use the information given above to estimate the unlevered equity betas for each of the companies. b. If Sterling's debt-to-equity capitalization ratio is .20 and its debt beta is 30, what is your estimate of the firm's levered equity beta?

Essentials Of Investments
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
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The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm's debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amount of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms:

Company Name Levered Equity Betas Debt/Equity Capitalizatioin Assumed Debt Betas
Easman Chemical Co. (EMN) 1.79 30.77% 0.30
Celanese Copr. (CE) 1.98 23.55% 0.30
Dow Chemical Company (DOW) 1.71 21.60% 0.30

a. Use the information given above to estimate the unlevered equity betas for each of the companies.

b. If Sterling's debt-to-equity capitalization ratio is .20 and its debt beta is 30, what is your estimate of the firm's levered equity beta?

(answer it in excel)

                           
  PROBLEM 4-7                  
                           
  Given   a. Solution:         Solution Legend
  Analysis of unlevered equity beta with risky debt beta = .30  Tax Rate 38%               = Value given in problem
                        = Formula/Calculation/Analysis required
    Levered  Debt/Equity Assumed   Unlevered           = Qualitative analysis or Short answer required
  Company Name Equity Betas Capitalization  Debt Betas    Equity Betas            = Goal Seek or Solver cell  
  Eastman Chemical Co. (EMN)                           1.7900 30.77% 0.30                        = Crystal Ball Input  
  Celanese Corp. (CE)                           1.9800 23.55% 0.30                        = Crystal Ball Output  
  Dow Chemical Company (DOW)                           1.7100 21.60% 0.30                           
                           
        Average                  
                           
  b. Solution                        
  Analysis of Sterling                        
  Analysis based on simple average of unlevered equity betas                      
  beta unlevered D/E beta debt D/E    beta levered               
    20.00% 0.30 0.2                  
                           
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