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Hi sir,
This question is from your revision notes.
If market return is 10% and risk rate is 5%, what is the required rate of return on debt which has a debt beta of 0.3? What is the cost of debt to the company if the tax rate is 33%?
Answer:
Required return = 5% + 0.37 (10%-5%) = 6.85%
Cost of debt = 6.85% X (1-0.33) = 4.59%Could you please explain where the 0.37 came from? Would be greatly appreciated.
Kind regards,
Yazan
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