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CHAPTER 15: Problem 3 Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6
CHAPTER 15: Problem 3 Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6 If the risk-free rate is 5.5% and the market risk premium is 6% how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Given Data: Unlevered Beta: 1.00 Levered Beta: 1.60 Risk-Free Rate: 5.50% Market Risk Premium: 6.00% Debt 50% Equity 50% Step 1: Calculate the Required Return if the company had no debt: (Input data and appropriate formula in the answer cell) Step 2: Calculate the Required Return if the company has debt: (Input data and appropriate formula in the answer cell) Step 3: Calculate the extra premium for taking on financial risk: Include an explanation ofhow varying degrees offinancial risk may command variations in shareholder return expectations
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