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“A company has an asset beta of 1.25 and a debt beta of 0.20. The market value of the company’s equity is $150m and the market value of its debt is $50m. The market premium is 8% and the risk-free rate is 6%. The tax rate is 30%.
What is the company’s cost of equity (to one decimal place of a percentage)?”
Why is the equity beta 1.495?
Where is this question from?
Is it this one?
A company has an asset beta of 1.25 and a debt beta of 0.20. The market value of the company’s equity is $150m and the market value of its debt is $50m. The market premium is 8% and the risk-free rate is 6%. The tax rate is 30%.
What is the company’s cost of equity (to one decimal place of a percentage)?
A.18.0%
B.9.0%
C.16.0%
D.8.5%Ba = Be * E/E + D1-t
1.25 = Be * 3/(3+.7)
1.25 = Be * 3/3.7
1.25 = Be * 0.8108
Be = 1.54 approx
So 6 +( 8 ) * 1.54 = 18% approximately
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Hi, you worked out the question I’m referring to. Where did the three come from? And what is the first formula you showed?
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This is the working on the study hub.
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
(I sent the previous question multiple times by accident.)
The 3 and 1 are just proportions of Equity and Debt
That is how I do beta equity and beta asset1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
This considers the debt beta, which I missed
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
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This is the complete working from the study hub.
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
Use CAPM to find the cost of equity as 6% + (1.495 × 8%) = 17.96% i.e. 18.0% to one decimal place of a percentage.
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