Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 18-5 Beta and Leverage North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.14 if both

Problem 18-5 Beta and Leverage

North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.14 if both were all equity financed. The market value information for each company is shown here:

North Pole South Pole
Debt $ 2,990,000 $ 3,900,000
Equity $ 3,900,000 $ 2,990,000

The expected return on the market portfolio is 11.7 percent and the risk-free rate is 3.7 percent. Both companies are subject to a corporate tax rate of 24 percent. Assume the beta of debt is zero.

a.

What is the equity beta of each of each company? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

b. What is the required rate of return on equity for each company? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

a. North Pole
South Pole
b. North Pole %
South Pole %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Applications In Energy Finance

Authors: Christos Floros, Ioannis Chatziantoniou

1st Edition

3030929566, 978-3030929565

More Books

Students also viewed these Finance questions