Question: Using the Hamada Model, regarding the relation between beta of a levered firm and the beta of a firm with no debt in its capital

Using the Hamada Model, regarding the relation between beta of a levered firm and the beta of a firm with no debt in its capital structure, calculate the following.

If the debt ratio is W_D=Debt/Assets and equity ratio is W_S= Equity/Assets , beta of the firm with leverage is

b_L= 1.35, T= 21%, debt ratio= 45%, equity ratio = 55%,

A. Calculate its beta without leverage.

B. Would you consider this as the beta of assets? Why?

C. Suppose the AA quality corporate bond yield is 5%, and the market risk premium is 7%, calculate the overall cost of capital for this firm based on the capital asset pricing model CAPM.

D. If the earnings of this firm is $900 mil per year in perpetuity, calculate the value of the firm.

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