You need to estimate the equity beta for Golden Clothiers, Inc. Golden’s debt-to-equity ratio is 85%, which is higher than a typical firm in its industry. The following table shows the levered equity betas and debt-to-equity ratios for three comparable firms. Assume the tax rate is 40%.

Company Levered Beta D/E ratio
TJ Maxx 1.68 0.25
New York & Co. 2.14 0.16
Express, Inc. 1.23 0.28

a. Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.

b. What is your estimate of Golden Clothiers’ levered equity beta?

c. If T-Bills are yielding 1.8% and the return on the market is 9.3%, what is the required return on Golden Clothiers’ stock, according to the CAPM?

d. Golden has 5-year maturity bonds outstanding with a par value of $1,000 that pay annual coupons of 5%. These bonds are currently selling for $982. What is Golden’s required return on debt?

e. If Golden has no preferred stock outstanding, their debt-to-equity ratio of 85% is expected to remain constant going forward, and their marginal tax rate is 40%, what is their weighted average cost of capital?

Answer rating: 100% (QA)

a From the levered beta and the debt equity ratio of other firms the higher the debt equity ratio th... View the full answer