The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm However, Sterling uses very little debt in its capital structure (the firms debt to equity capitalization ratio is only 20 ), while larger chemical firms use substantially higher amounts of debt The fol...

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The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm.

Question:

The CFO of Sterling Chemical is interested in evaluating the capital for his firm. However, Sterling uses very little debt in its (the firm€™s debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amounts of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms:

a. Use the information given above to estimate the unlevered equity betas for each of the companies.
b. If Sterling€™s debt-to-equity capitalization ratio is .20 and its debt beta is .30, what is your estimate of the firm€™s levered equity beta?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...