4-7 Given Analysis of unlevered equity beta with risky debt beta = .30 a. Solution Levered Tax Rate 38% Debt/Equity Assumed Company Name Equity Betas Capitalization Debt Betas Eastman Chemical Co. (EMN) 1.7900 30.77% 0.30 Celanese Corp. (CE) 1.9800 23.55% 0.30 Dow Chemical Company (DOW) 1.7100 21.60% 0.30 Average Average b. Solution Analysis of Sterling Analysis based on simple average of unlevered equity betas beta unlevered Unlevered Equity Betas D/E beta debt D/E beta levered 20.00% 0.30 0.2 4-7 ESTIMATING THE UNLEVERED BETA The CFO of Sterling Chemical is interested in evaluating the cost of equity capital for his firm. However, Sterling uses very little debt in its capital structure (the firm's debt-to-equity capitalization ratio is only 20%), while larger chemical firms use substantially higher amounts of debt. The following table shows the levered equity betas, debt-to-equity ratios, and debt betas for three of the largest chemical firms: Levered Debt/Equity Assumed Company Name Equity Betas Capitalization Debt Betas Eastman Chemical Co. (EMN) 1.79 30.77% 0.30 Celanese Corp. (CE) 1.98 23.55% 0.30 Dow Chemical Company (DOW) 1.71 21.60% 0.30 CHAPTER 4 Estimating a Firm's Cost of Capital a. Use the information given above to estimate the unlevered equity betas for each of the companies. b. If Sterling's debt-to-equity capitalization ratio is .20 and its debt beta is .30, what is your estimate of the firm's levered equity beta