Question
1. AFM Radio Inc.s equity has a book value of $25 million and a market value of $75 million. The market value of its debt
1. AFM Radio Inc.s equity has a book value of $25 million and a market value of $75 million. The market value of its debt is equal to the book value, $50 million. The companys pre-tax cost of debt is 10%. The companys stock has a beta of 1.5. Assume a corporate tax rate of 30%, a risk-free rate of 5%, and an expected market risk premium of 10%. (20 points)
(a) Whats the companys cost of equity, rE?
(b) Whats the companys pre-tax WACC or rA?
(c) Whats the companys after-tax WACC?
(d) Whats the beta of the companys debt, D?
(e) Whats the companys asset beta, A?
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Modern Portfolio Theory and Investment Analysis
Authors: Edwin Elton, Martin Gruber, Stephen Brown, William Goetzmann
9th edition
9781118805800, 1118469941, 1118805801, 978-1118469941
