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%
Eric Rowan is planning to buy a house for $155,000 by borrowing money at the rate of 9%. He expects to rent the house for 5 years, collecting $20,000 annual rent in advance each year. He thinks that he can sell the house for $175,000 after five years. Fulton has incom
What impacts have on the value of a business of high inflation?
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 would the future value after 5 years of $100 be at 10% compound interest?
Benefits of Cash to cash analysis: The benefits of Cash to cash analysis are as following: 1. Helps in better cash management situation thus, increasing liquidity. 2. The cash a
Efficiency Ratios: These ratios comprise Receivables Turnover, Inventory Turnover, Asset Turnover and Net Working Capital Turnover ratios. Efficiency ratios show the utilization of Assets of the company thus as to generate Revenue that is, the best ut
Explain the model of Heath, Jarrow and Morton regarding tree building or Monte Carlo simulation.
Active vs. Passive fund managers: Passive fund managers adopt a long term buy and hold strategy. Usually, stocks are purchased so that the portfolio’s returns will track those of an
Is the Free Cash Flow (FCF) the sum of the debt cash flow and the equity cash flow?
18,76,764
1937108 Asked
3,689
Active Tutors
1446877
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!