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?

  • CreatedNovember 13, 2015
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