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1 In Dec 1995, Boise Cascase's stock had a beta of 0.95. T-Bill rate at that time was 5.8%. T-Bond rate at that time was
1 | In Dec 1995, Boise Cascase's stock had a beta of 0.95. | ||||||
T-Bill rate at that time was 5.8%. | |||||||
T-Bond rate at that time was 6.4%. | |||||||
Outstanding Debt of the firm was $ 1.7 billion. | |||||||
Market Value (MV) of Equity was $ 1.50 billion. | |||||||
Corporate Marginal Tax rate was 36%. | |||||||
Historical Risk premium for stocks over T-Bills is 8.5%. | |||||||
Risk Premium for stocks over T-Bonds is 5.5%. | |||||||
a) | Estimate the expected return on the stock for a short-term investor in the company. | ||||||
b) | Estimate the expected return on the stock for a long-term investor in the company. | ||||||
c) | Estimate the Cost of Equity for the company. | ||||||
If Boise Cascase also had a debt outstanding of $ 1.7 billion and a | |||||||
Market Value (MV) of Equity of $ 1.50 billion and | |||||||
Coporate Marginal Tax Rate of 36% | |||||||
d) | if the current beta is 0.95, estimate the unlevered beta. | ||||||
e) | How much of the Risk in the company can be attributed to business risk and | ||||||
how much to financial leverage risk? |
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