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A comparable firm has an equity beta of 1.8 and a debt beta of .7. It currently has $300 million in equity and $750 million
A comparable firm has an equity beta of 1.8 and a debt beta of .7. It currently has $300 million in equity and $750 million in debt. The market risk premium is 4% and the risk-free rate is 2%. The corporate tax rate is 35%. Assume the CAPM determines required returns.
A. If the comparable maintains a constant leverage ratio, estimate its return on unlevered equity.
B. If the comparable maintains a constant dollar amount of debt, estimate its return on unlevered equity.
C. What is the required return on levered equity for the comparable?
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