Suppose that firm A is considering entering a business similar to firm B, a relatively small firm
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Suppose that firm A is considering entering a business similar to firm B, a relatively small firm in a single line of business. Firm A is currently financed with 60% debt and 40% equity. Firm B, the pure-play firm, has a of 0.95 and is financed with 40% debt and 60% equity. Firm B's marginal tax rate is 30% and firm A's marginal tax rate is 25%. Assume the riskless rate is 2% and the market return is 8%.
- According to the CAPM, the market risk premium is _____________ percent.
- What is Firm B's unleveraged beta?
- What is Firm A's leveraged beta?
- Estimate firm A's cost of equity for the new business using the CAPM. Answer is decimal format.
Related Book For
Managerial economics
ISBN: 978-1118041581
7th edition
Authors: william f. samuelson stephen g. marks
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