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Please answer part B of this problem Stodgy Corp. has a debt-equity ratio (in market value terms) of 1/9. The beta of Stogy's stock is
Please answer part B of this problem
Stodgy Corp. has a debt-equity ratio (in market value terms) of 1/9. The beta of Stogy's stock is 1.2. Stogy's debt has a yield to maturity of 5%. The risk-free rate of return is 5%, and the risk premium on the market portfolio is 8%. The corporate tax rate is 35%. What are Stogy's cost of equity and weighted average cost of capital? For a company with debt, we know that the cost of equity is given by: R_S=R_F +p, (R_M-R_r) where J3l is the beta of the levered company's stock. If the same company were, instead, unlevered (i.e., it had no debt), its beta would be beta u, and its cost of equity, Ro, would be given by: R_0=R_i+beta_u(R_m-R_F) We also know that if a company's debt is risk-free, the relationship between its levered and unlevered cost of equity is given by: R_s =R_0 + B/S (1-t_C)(R_0-R_F) Using these three equations, derive the relationship between a company's levered beta (beta_L) and its unlevered beta (|3u) when the company's debt is risk-free. c) Using the relationship you have derived in (b), find Stogy's unlevered beta, beta, and the cost of equity it would have if it had no debt, R_0Step by Step Solution
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