Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Consider the following information based on firms that are in a single line of business: Company name A B
Consider the following information based on firms that are in a single line of business: Company name A B. Equity beta 1.6 0.8 1.3 0.7 1.1 Debt in millions $320 $365 $1,447 $2,332 $334 Equity in millions $461 $5,186 $3,811 $1,456 $314 Market risk premium 4% 5% 6% 4% 4% Assuming a marginal tax rate of 34%, risk-free rate is 5%. a) Calculate the asset beta for each firm. b) Calculate the cost of capital for each firm.
A
Debt beta is by default 0
Unlevered beta or Asset beta of firm =Levered beta or Equity beta /(1 +( (1-tax rate)*Debt/Equity))
Asset beta of firm A = 1.6/(1+((1-34%)*320/461))
=1.097292472
Asset beta of firm B =0.8/(1+((1-34%)*365/5186))
=0.7644880134
Asset beta of firm C =1.3/(1+((1-34%)*1447/3811))
=1.03950466
Asset beta for firm D= 0.7/(1+((1-34%)*2332/1456))
=0.3402868666
Asset beta for firm E= 1.1/(1+((1-34%)*334/314))
=0.6462839608
Asset beta of firm A is 1.0973
Asset beta of firm B is 0.7645
Asset beta of firm C is 1.0395
Asset beta for firm D is 0.3403
Asset beta for firm E is 0.6463
B
Cost of capital for firm = Risk free rate + (asset beta*market risk premium)
Cost of capital for Firm A = 5% + (1.097292472*4%)
=0.09389169888 or 9.39%
Cost of capital for Firm B = 5% + (0.7644880134*5%)
=0.08822440067 or 8.82%
Cost of capital for Firm C = 5% + (1.03950466*6%)
=0.1123702796 or 11.24%
Cost of capital for Firm D = 5% + (0.3402868666*4%)
=0.06361147466 or 6.36%
Cost of capital for Firm E = 5% + (0.6462839608*4%)
=0.07585135843 or 7.59%
Cost of capital for Firm A is 9.39%
Cost of capital for Firm B is 8.82%
Cost of capital for Firm C is 11.24%
Cost of capital for Firm D is 6.36%
Cost of capital for Firm E is 7.59%
