S

ergen Corporation does not have any debt right now.

Next year, Sergen Cor

poration plans

to borrow up to

6

0% of its equity value

to fund future growth.

A

ssume

the t

ax r

ate is

3

0%

,

the

2

-

year T

-

bond rate is

5

%

and

the

his

torical market risk premium is

3

%

.

In the fo

llowing table,

you can find the

b

etas of

the

companies

in the same industry, which have no debt.

(15 pts)

C

ompany

B

eta

Co

rdoba

1.0

Ronaldo

1.

1

Zago

1.

3

Giunti

1.

4

I

lhan

1

.

5

a.

F

ind the unlever

e

d beta of the Sergen Corporation

by looking at the

c

ompetitors

.

(5 pts)

b.

C

alculate Sergen

s current cost of equity

.

(5 pts)

c.

Estimate

the firm

s cost of equity after it increases its leverage to 60% of equity.

(5 pts)