42. A company is estimating its optimal capital structure. Now the company has a capital structure that consists of 20% debt and 80% equity, based on market values (debt to equity D/S ratio is 0.25). The risk-free rate (rRF) is 5% and the market risk premium (rM – rRF) is 6%. Currently the company’s cost of equity, which is based on the CAPM, is 14% and its tax rate is 20%. Find the firm’s current leveraged beta using the CAPM 1.0 1.5 1.6 1.7Question 43Based on the information from Question 42, find the firm’s unleveraged beta using the Hamada Equation 0.95 1.0 1.25 1.35Question 43Based on the information from Question 42, find the firm’s unleveraged beta using the Hamada Equation 0.95 1.0 1.25 1.35Question 44Based on the information from Question 42 and 43, what would be the company’s new leveraged beta if it were to change its capital structure to 50% debt and 50% equity (D/S=1.0) using the Hamada Equation? 1.25 1.35 1.95 2.25Based on the information from Question 42 ~ 44, what would be the company’s new cost of equity if it were to change its capital structure to 50% debt and 50% equity (D/S =1.0) using the CAPM? 13.8% 15.6% 16.8% 18.5%

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Answered: 42. A company is estimating its optimal…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 1P: Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1...

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Question 43

Based on the information from Question 42, find the firm’s unleveraged beta using the Hamada Equation

		0.95
		1.0
		1.25
		1.35

Question 43

Based on the information from Question 42, find the firm’s unleveraged beta using the Hamada Equation

		0.95
		1.0
		1.25
		1.35

Question 44

Based on the information from Question 42 and 43, what would be the company’s new leveraged beta if it were to change its capital structure to 50% debt and 50% equity (D/S=1.0) using the Hamada Equation?

		1.25
		1.35
		1.95
		2.25

Based on the information from Question 42 ~ 44, what would be the company’s new cost of equity if it were to change its capital structure to 50% debt and 50% equity (D/S =1.0) using the CAPM?

		13.8%
		15.6%
		16.8%
		18.5%

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