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Consider the following information about the TSP Corp: Current Debt/Equity Ratio: 0.50 Current Beta ( B): 1.50 Tax rate: 50% Average Market Return: 15% 3-month
Consider the following information about the TSP Corp: Current Debt/Equity Ratio: 0.50 Current Beta ( B): 1.50 Tax rate: 50% Average Market Return: 15% 3-month Treasury bill rate: 7% 12. Compute the equilibrium expected return of TSP from the CAPM under the levered beta: 7% + 1.5*(15%-7%) = 19% 13. Compute the unlevered beta of TSP: 1.5 QUL IBM =1.20 [1+(0.5)(0.5)] 14. Compute the equilibrium expected return of TSP from the CAPM under the unlevered beta: 7% + 1.2*(15%-7%) = 16.6% 15. Compute the business risk premium of TSP under the current Debt/Equity Ratio of 0.25: 1.2*(15-7)= 9.6% 16. Compute the financial risk premium of TSP under the current Debt/Equity Ratio of 0.25: (1.5-1.2)*(15-7) = 2.4% 17. Suppose that the firm increases the debt ratio to 50%. Compute the new beta under the new debt ratio
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