10. The following are the betas of the equity of four forestry/paper product companies, and their...

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10. The following are the betas of the equity of four forestry/paper product companies, and their debt/equity ratios. Company Beta 1.15 Debt/Equity Ratio 33.91% BB International 1.18 54.14% CC Paper 1.05 45.50% DD 0.91 11.29% (All the firms face a corporate tax rate of 40%) a. Estimate the unlevered beta of each firm. What do the unlevered betas tell you about these firms? b. Assume now that DD is planning to increase its debt/equity ratio to 30%. What will its new beta be? c. If you were valuing an initial public offering in the paper products area, what beta would you use in the valuation? (Assume that the firm going public plans to have a debt/equity ratio of 40%.) 1 11. Leisure Inc. is examining its capital structure, with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research indicates that the debt rating will be as follows at different debt levels: D/(D+E) Rating Interest rate 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% 25% The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%). Editor. Check for Spelling, Gr Writing Issues a. What is the firm's optimal debt ratio? b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring? 10. The following are the betas of the equity of four forestry/paper product companies, and their debt/equity ratios. Company Beta 1.15 Debt/Equity Ratio 33.91% BB International 1.18 54.14% CC Paper 1.05 45.50% DD 0.91 11.29% (All the firms face a corporate tax rate of 40%) a. Estimate the unlevered beta of each firm. What do the unlevered betas tell you about these firms? b. Assume now that DD is planning to increase its debt/equity ratio to 30%. What will its new beta be? c. If you were valuing an initial public offering in the paper products area, what beta would you use in the valuation? (Assume that the firm going public plans to have a debt/equity ratio of 40%.) 1 11. Leisure Inc. is examining its capital structure, with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research indicates that the debt rating will be as follows at different debt levels: D/(D+E) Rating Interest rate 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% 25% The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%). Editor. Check for Spelling, Gr Writing Issues a. What is the firm's optimal debt ratio? b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring?