1) North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have equal equity betas of= 1.18 if both were all equity financed. Market value information for each company is given below:
North Pole South Pole
Debt $ 2,980,000 $ 3,880,000
Equity $ 3,880,000 $ 2,980,000
Expected return on market portfolio is 11.7%, and risk-free rate is 4%. Both companies are subject to a corporate tax rate of 35%. Suppose the beta of debt is zero.
a) describe the equity beta of each of two companies?
b) What is the needed rate of return on each of two companies’ equity?
Rate of return
North Pole %
South Pole %