Question 4. Beta and Cost of Capital DLT Inc. is a private company and has two lines of business: Oil&Gas and Energy Management, with 70% of the firm's sales generated by the Oil&Gas division DLT has a target capital structure of 20% debt financing (DV=209) The following table shows the financials of selected comparable companies in Smm). ORGOS Eergy angement S2P300T30-50 70-30 Industry Industry Index portfolio Portfolio Company OG Company EM Oil&Gas Yes Target capital structure Tax Rate DV 40% 10% Debt Beta Equity Beta Standard Deviation of 10% monthly stock returns over latest 3 years Note: Generally we select more than cac comparable companies in each industry, to reduce the emer and ise in estate Additional market data and information: The 3-month Treasury bill yield is 2%. The 10-year Treasury note yield is 3% The market risk premium is 6% The marginal tax rate is 21%. (1) Use the following numbers to fill in the missing standard deviations of stock returns in the last row of the table, match the appropriate standard deviation with the security portfolio 5% 9% 12% (2) Calculate the asset beta and total beta of company OG and DLT. (3) Calculate the unlevered cost of capital (or unlevered cost of equity), cost of equity and cost of undiversified equity of DLT. Question 4. Beta and Cost of Capital DLT Inc. is a private company and has two lines of business: Oil&Gas and Energy Management, with 70% of the firm's sales generated by the Oil&Gas division DLT has a target capital structure of 20% debt financing (DV=209) The following table shows the financials of selected comparable companies in Smm). ORGOS Eergy angement S2P300T30-50 70-30 Industry Industry Index portfolio Portfolio Company OG Company EM Oil&Gas Yes Target capital structure Tax Rate DV 40% 10% Debt Beta Equity Beta Standard Deviation of 10% monthly stock returns over latest 3 years Note: Generally we select more than cac comparable companies in each industry, to reduce the emer and ise in estate Additional market data and information: The 3-month Treasury bill yield is 2%. The 10-year Treasury note yield is 3% The market risk premium is 6% The marginal tax rate is 21%. (1) Use the following numbers to fill in the missing standard deviations of stock returns in the last row of the table, match the appropriate standard deviation with the security portfolio 5% 9% 12% (2) Calculate the asset beta and total beta of company OG and DLT. (3) Calculate the unlevered cost of capital (or unlevered cost of equity), cost of equity and cost of undiversified equity of DLT
