The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate is 35%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap E/Cap Bond Before-Tax Cost of Levered Beta Cost of Equity ( Ratio Ratio D/E Ratio Rating Debt (ra) (b) rs) WACC 0.0 1.0 0.00 1.1 11.80% 11.80% 0.2 0.8 0.25 A 8.4% 13.232% 11.678% 0.4 0.6 0.67 BBB 8.9% 1.577 15.616% 0.6 0.4 1.50 BB 11.1% 2.173 12.483% 1200
The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate is 35%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap E/Cap Bond Before-Tax Cost of Levered Beta Cost of Equity ( Ratio Ratio D/E Ratio Rating Debt (ra) (b) rs) WACC 0.0 1.0 0.00 1.1 11.80% 11.80% 0.2 0.8 0.25 A 8.4% 13.232% 11.678% 0.4 0.6 0.67 BBB 8.9% 1.577 15.616% 0.6 0.4 1.50 BB 11.1% 2.173 12.483% 1200
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
Related questions
Question
![Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity.
The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of
capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate
is 35%.
Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial
information that follows to analyze its weighted average cost of capital (WACC). Complete the following table.
D/Cap
E/Сap
Bond
Before-Tax Cost of
Levered Beta
Cost of Equity (
Ratio
Ratio
D/E Ratio
Rating
Debt (ra)
(b)
Is)
WACC
0.0
1.0
0.00
1.1
11.80%
11.80%
0.2
0.8
0.25
A
8.4%
13.232%
11.678%
0.4
0.6
0.67
BBB
8.9%
1.577
15.616%
0.6
0.4
1.50
BB
11.1%
2.173
12.483%
0.8
0.2
14.3%
3.960
34.680%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8295c3d9-4ab5-47e4-96e0-bef6def0151e%2F84d0d771-535a-4c60-8c5e-70af1b675a48%2Fm3973jd_processed.png&w=3840&q=75)
Transcribed Image Text:Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity.
The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of
capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate
is 35%.
Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial
information that follows to analyze its weighted average cost of capital (WACC). Complete the following table.
D/Cap
E/Сap
Bond
Before-Tax Cost of
Levered Beta
Cost of Equity (
Ratio
Ratio
D/E Ratio
Rating
Debt (ra)
(b)
Is)
WACC
0.0
1.0
0.00
1.1
11.80%
11.80%
0.2
0.8
0.25
A
8.4%
13.232%
11.678%
0.4
0.6
0.67
BBB
8.9%
1.577
15.616%
0.6
0.4
1.50
BB
11.1%
2.173
12.483%
0.8
0.2
14.3%
3.960
34.680%
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