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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)?
A.18.0%
B.9.0%
C.16.0%
D.8.5%Hi Sir. i did this question and with ignoring the debt beta i eventually got the right answer which is 18%. But i dont know how to use the debt beta and after several attempts, i did not manage, kindly assist with an explanation. It is a study hub question.
Update: i have managed, thank you however, you do great work in helping us :))
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