You need to estimate the equity beta for Golden Clothiers, Inc. Golden’s debt-to-equity ratio is 85%, which is higher than a typical firm in its industry. The following table shows the levered equity betas and debt-to-equity ratios for three comparable firms. Assume the tax rate is 40%.
Company Levered Beta D/E ratio
TJ Maxx 1.68 0.25
New York & Co. 2.14 0.16
Express, Inc. 1.23 0.28
e. If Golden has no preferred stock outstanding, their debt-to-equity ratio of 85% is expected to remain constant going forward, and their marginal tax rate is 40%, what is their weighted average cost of capital?"
Golden's required return on debt is ~5.42%
Return on equity is 18.66%
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