Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a...

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Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks)

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SOLUTION a To calculate Cerrados Levered Beta we need to use the median beta of comparable firms in ... View the full answer