A company, ABC, has a capital structure of 60% equity and 40% debt.  Since the company is private, it has no published beta and the CFO is having difficulty calculating its cost of equity.  The CFO has identified a publicly traded company, XYZ, that is in the identical business as ABC. Since the firms are similar, the CFO will use XYZ's  beta to determine ABC's beta.  XYZ has a beta of 1.6 and a capital structure of 75% equity and 25% debt.  

The risk-free rate is 3% and the market risk premium is 7%.   Assume a 25% tax rate:

a. What is the unlevered beta for XYZ?

b. What is the levered beta for ABC?

c. What is the cost of equity (i.e., required return) for ABC?   

Answer rating: 100% (QA)

Unlevered beta Beta of Trail 1 1 1 tax rate debt equity Unlevered beta 16 1 1 1 25 ... View the full answer