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%
Baldwin Corporation is planning to expand into the business of providing on-demand movies. Baldwin has debt-to-equity ratio of .25, its pretax cost of debt is 9%, and its marginal tax rate is 40%. The Harrington Corporation is already in the on-demand movie business,
Ape Car Rental plans to begin its business by buying 10 cars at the average price of $18,000 each, depreciating them entirely over 5 years utilizing the straight-line method. It will rent space in a parking lot for $300 a month, paying the rent in advance every month.
Explain exotic option’s value of option pricing method.
You have decided to invest 30 percent in X; 30 percent in Y; and 40 percent in Z. Theprobability of the state of the economy is Boom 25%; Normal 60%; and, Bust 15%. The rateof return for stock X is Boom .20; Normal .15; and, Bust .00. The rate of return for stock Y is
What are the Attributes of debt securities?
The share price of Cheung Kong (Holdings) Limited is currently at $100. Over each of the next two three-month periods, you expect its price will either increase by 10% or fall by 10% in each three-month period. If the Hong Kong interbank offered rate is 8% per annum w
Is PER an excellent guide to investments?
What is the current example of a value company and would you buy it as an investment. Why or why not?
How could we project exchange rates within order to be capable to forecast exchange differences?
XYZ Company has debt/assets ratio 50%, that is too high and it must be at 45% to be optimal. This debt reduction must also reduce the bankruptcy costs by $30 million. At present, XYZ has 5 million shares of common stock selling at $50 each. The tax rate of XYZ is 30%.
18,76,764
1945085 Asked
3,689
Active Tutors
1453794
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!