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. Find the Levered Beta and Cost of equity in the first table and find the C ost of equity and WACC i n the
. Find the Levered Beta and Cost of equity in the first table and find the Cost of equity and WACC in the second table then answer the questions below the tables.
No DEBT | Moderate Debt | High Debt | |
Weight of Equity | 1 | 0.6 | 0.2 |
Weight of debt | 0 | 0.4 | 0.8 |
Tax rate | 0.21 | 0.21 | 0.21 |
Unlevered Beta | 2 | 2 | 2 |
Levered Beta | |||
Risk-free | 3.15% | 3.15% | 3.15% |
MRP | 5.04% | 5.04% | 5.04% |
Cost of equity |
No Debt | Moderate Debt | High Debt | |
weight of equity | 1 | 0.6 | 0.2 |
weight of debt | 0 | 0.4 | 0.8 |
Cost of equity | |||
Cost of debt | 0 | 4% | 5.5% |
Tax rate | 0.21 | 0.21 | 0.21 |
WACC |
What do you notice about the beta and cost of equity as debt increases? What explains this?
What do you notice about the cost of debt as debt increases? What explains this?
What do you notice about the cost of capital as debt increases? What explains this?
Thanks in advance
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