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A privately hold corporation wishes to estimate its cost of equity. The firm has a target debt-to-equity ratio of 0.5 and the marginal tax rate is 35%. The yield on 10 year U.S. Treasury securities is 4% and the expected market risk premium is 6%. It has identified 3 pure play firms with the following equity betas and debt-to-equity ratios:

Firm ......... Beta ........... D/E Ratio

A ............... 1.8 ............ 0.6

B ............... 1.2 ............ 0.4

C .............. 2.1 ............ 0.8

What is the firm's estimated equity beta (levered beta)? What is the cost of equity for the privately held firm?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91609424

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