prob sol 5-2 - 8.25% PROBLEM 5-2 a . Cost of Equity b. WACC...

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Given Solution Legend Debt Ratio (current) 30.0% = Value given in problem Equity Ratio (current) 70.0% = Formula/Calculation/Analysis required Cost of Debt 6.0% = Qualitative analysis or Short answer required Market Risk Premium 5.25% = Goal Seek or Solver cell Equity Beta 1.20 = Crystal Ball Input Debt Beta 0.29 = Crystal Ball Output Risk Free Rate 4.5% Corporate Tax Rate 0.35 Solution 10.80% 8.73% Unlevered beta (current debt levels) 1.00 Revised Equity Beta 1.27 Cost of Equity 11.14% Debt Ratio 40.0% Equity Ratio 60.0% Revised WACC
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Unformatted text preview: 8.25% PROBLEM 5-2 a . Cost of Equity b. WACC c. Note: This analysis presumes that the cost of debt financing is "sticky" in the sense that it varies in a discrete fashion with the firm's bond rating. In other words, even though the firm has increased its use of financial leverage from 35 to 40% the cost of debt (and the debt beta) do not change.bOn the other hand, the cost of equity does change since the higher leverage implies a higher equity beta....
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This note was uploaded on 03/12/2012 for the course FINANCE 630 taught by Professor Smith during the Spring '12 term at University of Maryland Baltimore.

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