8 to calculate the required return ks a more

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Unformatted text preview: h each capital structure alternative directly to the required return. Such an approach is similar to the CAPM-type approach demonstrated in Chapter 10 for linking project risk and required return (RADR). Here it involves estimating the required return associated with each level of financial risk, as measured by a statistic such as the coefficient of variation of EPS. Regardless of the approach used, one would expect the required return to increase as the financial risk increases. EXAMPLE Cooke Company, using as risk measures the coefficients of variation of EPS associated with each of the seven alternative capital structures, estimated the associated required returns. These are shown in Table 12.14. As expected, the estimated TABLE 12.14 Capital structure debt ratio 0% Required Returns for Cooke Company’s Alternative Capital Structures Coefficient of variation of EPS (from column 3 of Table 12.13) (1) Estimated required return, ks (2) 0.71 11.5% 10 0.74 11.7 20 0.78 12.1 30 0.83 12.5 40 0.91 14.0 50 1.07 16.5 6...
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This document was uploaded on 01/19/2014.

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