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Please answer Question a), b), c) and d) Stodgy Corp. has a debt-equity ratio (in market value terms) of 1/9. The beta of Stodgy's stock
Please answer Question a), b), c) and d)
Stodgy Corp. has a debt-equity ratio (in market value terms) of 1/9. The beta of Stodgy's stock is 1.2, stodgy'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%. a) What are Stodgy's cost of equity and weighted average cost of capital? b) For a company with debt, we know that the cost of equity is given by: where Ls 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 Bu, and its cost of equity, Ro, would be given by: We also know that if a company's debt is risk-free, the relationship between its levered and unlevered cost of equity is given byStep by Step Solution
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