Question
Arizona Iron Corp is an American company operating in the mining sector. Arizonas equity beta is unknown. Corporate tax rate is 40% and the risk-free
Arizona Iron Corp is an American company operating in the mining sector. Arizonas equity beta is unknown. Corporate tax rate is 40% and the risk-free rate is 4% in the US. Expected return on the market portfolio in the US is 9%. There are three comparable firms competing with Arizona Iron in the mining sector and some information about these firms is given below. Arizona has 100,000 shares outstanding, selling for $6 per share. Arizona also has 500 bonds outstanding with 8% annual coupon payments, $1,000 par value, 10 years to maturity, currently selling for $935. These bonds make up all the interest-bearing debt on Arizonas balance sheet.
Comparable Firms |
Levered Beta of the Name Firm D/E of the Firm |
Denver Mining Inc. Nevada Iron Ore Corp. SunCity Mines Inc. 1.3 30% 1.5 60% 1.5 50% |
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(a) Using information given in the table, calculate the asset (unlevered) beta of Arizona Iron Corp.
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(b) Use your result from part (a) and compute the levered beta of Arizona. Then compute Arizonas return on equity using CAPM.
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(c) Compute the cost of debt for Arizona. Arizonas cost of debt is somewhere between 8% and 10%.
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(d) Compute the WACC for Arizona. If you could not find the cost of debt in part (c), just assume that the cost of debt is 10% and compute the WACC accordingly.
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