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%
Is this possible to use a constant WACC in the valuation of a company along with a changing debt?
I have a doubt about the Enron case. How could this prestigious investment bank advice investing while the quotations of the shares were falling?
Sometimes, companies accuse investors of performing credit sales which they make their quotations fall. Is it true?
what can we expanded opportinity set of international finance?
The financial ratios of a firm are as follows. Current ratio = 1.33 Acid-test ratio = 0.80 Current liabilities = 40,000 Inventory turnover ratio = 6 What is the sales of the firm?
A court assigned to me (as an auditor and economist) a valuation of a market butcher’s. The butcher’s did not give any simple income statements or any valuable information that I could use in my valuation. This is a small business with just two workers, th
Case Study 1 You work in Walt Disney Company's corporate finance and treasury department and have just been assigned to the team estimating later today. You quickly realize that the information you need is readily available online. 1) Go to http://finance.yahoo.com. under " Market Summary," you
Explain useful properties of low-discrepancy sequence theory or quasi random number theory.
Financial Analysis: It is the investigation and interpretation of financial statements and associated financial reports. Trained and certified accountants generally complete this kind of analysis. The role of a financial analyst is to
If the model could not even find bond prices right, how could this hope to accurately value bond options?
18,76,764
1926544 Asked
3,689
Active Tutors
1456541
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!