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 there any relationship in between the flow to shareholders and the net income?
There are four methods a company can utilize the money this generates: a) Buying other assets or companies; b) Reducing debt of it; c) Distribute this to shareholders, and d) Increasing cash holdings of it.
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?
A middle income worker, with a dependent spouse older than the normal retirement age, retired in January 2004. In the year prior to retirement, her gross monthly earnings were $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her
Provide a brief overview of Capital Market Efficiency?
A financial consultant obtains various valuations of my company when this discounts the Free Cash Flow (FCF) as opposed to when this uses the Equity Cash Flow. Is it correct?
Is a valuation realized through a prestigious investment bank a scientifically approved result that any investor could utilize as a reference?
Your Corp, Inc.'s data is as follows:Beta; 1.30Recent dividend; $.90Expected dividend growth; 7%Expected return of the market; 14%Treasury Bills are yielding; 4%Most recent stock price; $65 A] Us
What is nonlinearity in option pricing model?
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
1939803 Asked
3,689
Active Tutors
1444068
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!