Question

The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm’s debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amounts of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms:
a. Use the information given above to estimate the unlevered equity betas for each of the companies.
b. If Sterling’s debt-to-equity capitalization ratio is .20 and its debt beta is .30, what is your estimate of the firm’s levered equity beta?


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  • CreatedNovember 13, 2015
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