A privately held corporation wishes to estimate its cost of equity.

The firm has a target debt-to-equity ratio of 0.5 and the marginal tax rate is 35%.

The yield on 10 year U.S. Treasury securities is 4% and the expected market risk premium is 6%.

It has identified 3 pure play firms with the following equity betas and debt-to-equity rations:

Firm .......... Beta ........ D/E Ratio

A ............... 1.8 ............ 0.6

B ............... 1.2 ............ 0.4

C .............. 2.1 ............ 0.8 .

What is the firm's estimated equity beta (levered beta)? .

A. 1.60

B. 1.40

C. 1.21

D. 1.70

E. 1.51