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You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a.   What are the equity beta (bE) and debt beta (bD) of the firm described above? [Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b.  What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c.   What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)

You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a.   What are the equity beta (bE) and debt beta (bD) of the firm described above? [Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b.  What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c.   What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter11: Determining The Cost Of Capital
Section: Chapter Questions
Problem 1Q: Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt,...
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You have the following information on a company on which to base your calculations and discussion:

  • Cost of equity capital (rE) = 18.55%
  • Cost of debt (rD) = 7.85%
  • Expected market premium (rM –rF) = 8.35%
  • Risk-free rate (rF) = 5.95%
  • Inflation = 0%
  • Corporate tax rate (TC) = 35%
  • Current long-term and target debt-equity ratio (D:E) = 2:5

a.   What are the equity beta (bE) and debt beta (bD) of the firm described above?
[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.]

b.  What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio?

c.   What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)

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