Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows: Firm Equity Beta Debt-Equity Ratio Aay 1.4 2 Bee 1.2 1.8 Cee 1.1 1.5 (a) What is the average asset beta of the three firms Aay, Bee, and Cee? (b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows: Firm Equity Beta Debt-Equity Ratio Aay 1.4 2 Bee 1.2 1.8 Cee 1.1 1.5 (a) What is the average asset beta of the three firms Aay, Bee, and Cee? (b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
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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Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows:
Firm
Equity Beta
Debt-Equity Ratio
Aay
1.4
2
Bee
1.2
1.8
Cee
1.1
1.5
(a) What is the average asset beta of the three firms Aay, Bee, and Cee?
(b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
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