ACTSC 372 A3

ACTSC 372 A3 - ACTSC 372 – Assignment#3 Due March 9 th at...

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Unformatted text preview: ACTSC 372 – Assignment #3 Due March 9 th at noon in the drop boxes Question 1: Prove that = + ( − )(1 − ). Where is the levered equity beta, is the unlevered equity beta, is the beta of debt. Show that when debt is riskless, we get the expression = 1 + ( 1¡¢ ) £ . (This is the formula (18.3) in the text. The proof of this formula at the bottom of that page in the text is ugly. There is a very simple proof of the first and more general expression in this question.) Question 2: ABC currently has no debt, 100,000 shares outstanding trading at $50 per share and the beta of its stock is 1.2. Assume the risk free rate is 5% and the market risk premium is 5%. ABC is thinking of changing its capital structure to a 50% debt-to-equity ratio. Assume the debt (when issued) will have a YTM of 6%. (Assume the proceeds of the debt sale all go to repurchasing equity, and assume the markets are efficient.) ABC currently pays no taxes. repurchasing equity, and assume the markets are efficient....
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