Question 42

A company is estimating its optimal capital structure. Now the company has a capital structure that consists of 20% debt and 80% equity, based on market values (debt to equity D/S ratio is 0.25). The risk-free rate (rRF) is 5% and the market risk premium (rM rRF) is 6%. Currently the companys cost of equity, which is based on the CAPM, is 14% and its tax rate is 20%. Find the firms current leveraged beta using the CAPM

a. 1.0

b. 1.5

c. 1.6

d. 1.7

Question 43

Based on the information from Question 42, find the firms unleveraged beta using the Hamada Equation

a. 0.95

b. 1.0

c. 1.25

d. 1.35