Question: PROBLEM 4-6 Given Levered equity beta 1.25 Treasure bond yield 4.28% Market risk premium 3.50% 7.00% Tax rate 25.00% Debt as % of Capital Structure

PROBLEM 4-6
Given
Levered equity beta 1.25
Treasure bond yield 4.28%
Market risk premium 3.50% 7.00%
Tax rate 25.00%
Debt as % of Capital Structure 25.00%
Solution
a. Low ERP High ERP
Cost of equity
b. WACC with Low ERP
Cap Str Weights After-Tax Costs Product
Debt 25.00%
Equity 75.00%
WACC with High MRP
Cap Str Weights After-Tax Cost Product
Debt 25.00%
Equity 75.00%

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