Textbook :Engineering Economy, 17th ED

Chapter 6 :Comparison and Selection among Alternatives

The table shows information for two companies. The current rate on long-term U.S. government Treasury Bills is 2.2% p.a. The market risk premium (RM Rp) pertaining to a diversified portfolio of corporate common stock is about 8.4% p.a. Company A Company B Equity beta 1.8 0.84 0.05 0.46 Debt-to-equity ratio Average cost of debt 6.0% p.a. 4.3% p.a. Effective income tax rate 12% 30% 17.32% 9.27% Cost of equity Weighted average cost of capital 16.75% 7.28% Write in details why there are differences between these two companies with respect to their beta values, debt-to-equity ratios, and average cost of debt