Arizona Iron Corp is an American company operating in the mining sector. Arizona’s equity beta is unknown. Corporate tax rate is 40% and the risk-free rate is 4% in the US. Expected return on the market portfolio in the US is 9%. There are three comparable firms competing with Arizona Iron in the mining sector and some information about these firms is given below. Arizona has 100,000 shares outstanding, selling for $6 per share. Arizona also has 500 bonds outstanding with 8% annual coupon payments, $1,000 par value, 10 years to maturity, currently selling for $935. These bonds make up all the interest-bearing debt on Arizona’s balance sheet.

Comparable Firms

Levered Beta of the
Name Firm D/E of the Firm

Denver Mining Inc. Nevada Iron Ore Corp. SunCity Mines Inc.

1.3 30% 1.5 60% 1.5 50%

1. (a) Using information given in the table, calculate the asset (unlevered) beta of Arizona Iron Corp.

2. (b) Use your result from part (a) and compute the levered beta of Arizona. Then compute Arizona’s return on equity using CAPM.

3. (c) Compute the cost of debt for Arizona. Arizona’s cost of debt is somewhere between 8% and 10%.

4. (d) Compute the WACC for Arizona. If you could not find the cost of debt in part (c), just assume that the cost of debt is 10% and compute the WACC accordingly.

Answer rating: 100% (QA)

a The first step is to unlever the beta of the competing three firms Unlevered beta Levered beta11tD... View the full answer