Question: Question 2 - Private Companys Beta Stone Inc is a privately held company and you have been asked to estimate its cost of equity. You

Question

2 -

Private Companys Beta Stone Inc is a privately held company and you have been asked to estimate its cost of equity. You identify XYZ Inc as a publicly traded peer company with a beta of

0.7 .

XYZ Inc is currently

30 %

funded by debt,

70 %

by Equity and its marginal tax rate is

20 % .

The risk

-

free rate is

5 %

and the market

-

risk premium is

8.0 % .

If Stone Inc is currently funded by

60 %

debt and

40 %

Equity funded its marginal tax rate is also

20 %,

answer the following question: a

.

Whats Stone Inc beta? b

.

What is the cost of equity for Stone Inc

,

based on the beta you found?

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