Problem on leveraged beta
AB Restaurants has debt/equity ratio .25, and its leveraged beta is 1.5. Its tax rate is 30%, and its cost of equity is 15%. The risk-free rate is 5%. CD Restaurants has debt/equity ratio .4, and tax rate 35%. Find the cost of equity for CD.
Expert
AB’s Cost of equity = 15% = 5% + 1.5 (Rm - 5%)1.5 Rm = 17.5%Rm = 11.67%Bu = BL/(1 + (1 – T)(D/E)) = 1.5/(1 + (1 – 0.3)(0.25) = 1.5/1.175 = 1.277
Hence with a D/E ratio of 40%,
BL = BU (1 + (1 – T)(D/E)) = 1.277 (1 + (1 – 0.35)(0.4)) = 1.61
Cost of equity = 5% + 1.61*(11.67% - 5%) = 15.72%
Why is Split useful?
Identify two comparable corporations. Explain why you think they are comparable to your corporation. Earnings analysis: Do an earnings analysis of your corporation. Calculate and plot. Q : Determine the future value What would What would the future value after 5 years of $100 be at 10% compound interest?
What would the future value after 5 years of $100 be at 10% compound interest?
Porter’s Primary activities: 1. Inbound Logistics: • Suppliers’ details.• Storage details with respect to materials.• Details regarding pl
Write Efficient Market Hypotheses in brief?
How can any industrial company inflate the value of its inventory so as to decrease net income and the taxes is has to pay in a year?
What repercussions do variations in the oil price have on the value of a company?
XYZ Company is interested in purchasing a new corporate jet for $6 million. This will depreciate the jet completely in 5 years and then sell it for $5 million. The jet will utilize $60,000 in fuel annually, and its maintenance will be $40,000 yearly. The tax rate of X
What is a 3 x 1 Split?
The part of the net income which is not distributed to shareholders goes to reserves (to shareholders’ equity). As dividends shows real money, reserves are real money as well. Is it true?
18,76,764
1959003 Asked
3,689
Active Tutors
1448024
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!