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
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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The CFO of Sterling Chemical is interested in evaluating the
| 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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