Problem $18-5$ Beta and Leverage

North Pole Fishing Equipment Corporation and South Pole Fishing Equipment

Corporation would have identical equity betas of $1\mathrm{.}15$ if both were all equity financed. The

market value information for each company is shown here:

The expected return on the market portfolio is $11\mathrm{.}8$ percent and the risk$-$free rate is $3\mathrm{.}8$

percent. Both companies are subject to a corporate tax rate of $25$ percent. Assume the

beta of debt is zero.

a$.$ What is the equity beta of each of each company? $($Do not round intermediate

calculations and round your answers to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ What is the required rate of return on equity for each company? $($Do not round

intermediate calculations and enter your answers as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.)$