EXERCISE $3(20\%)$

We have the following data for the company Tato ASA:

Net interest$-$bearing debt: NOK $10000000$

Market value of equity: NOK $10000000$

Beta of equity: $1,3$

Beta of debt: $0,5$

Risk$-$free interest rate: $2,5\%$

Expected market risk premium: $5\%$

Tax rate: $0\%.$

a$)$ Estimate the required rate of return on equity.

b$)$ Estimate the cost of debt.

c$)$ Calculate the weighted average cost of capital.

The company reduces its equity to NOK $7500000($in market value$)$ and increases its net interestbearing debt to NOK $12500000.$