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I have completed part A properly. I just need to know the solutions for the last 2 page part B and C. Part C. Use
I have completed part A properly. I just need to know the solutions for the last 2 page part B and C.
Part C. Use the information in the table below to measure a project's cost of equity capital based on the alternative assumptions that follow. Tax rate Value of Debt Financing Value of Preferred Financing Value of Equity Financing Total 40% 2,000 3,000 5,000 10,000 Beta of debt Beta of preferred Risk-free rate Market risk premium 0.60 1.20 2% 5% C1. Assuming an unlevered beta of 1.5, use the CAPM equation E[r] = rF + Beta * [E(rM)-rF] to calculate the project's unlevered cost of capital, rU. C2. Assuming an unlevered beta of 1.5, calculate the levered beta given that the company has a stable capital structure policy (fixed capital proportions) and, accordingly, interest tax shields have the same risk as the free cash flows. C3. Use the calculated levered betas and the CAPM equation to calculate the project's cost of equity. C4. Assuming an unlevered beta of 1.5, calculate the levered beta given that the company intends to fix its debt level at $2000 and, accordingly, interest tax shields have the same risk as debt. C5. Use the calculated levered betas and the CAPM equation to calculate the project's cost of equity. C6. Assuming an unlevered beta of 1.5, calculate the levered beta using the Hamada equation with debt to equity ratio set equal to the ratio of the planned level of debt and equity financing given in the table above. C7. Use the calculated levered betas and the CAPM equation to calculate the project's cost of equityStep by Step Solution
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