Given Debt Ratio (current) 30.0% = Value g Equity Ratio (current) 70.0% = Formula Cost of Debt 6.0% = Qualita Market Risk Premium 5.25% = Goal Se Equity Beta 1.20 = Crystal Debt Beta 0.29 = Crystal Risk Free Rate 4.5% Corporate Tax Rate 0.35 Solution 10.80% 8.73% Unlevered beta (current debt l 0.94 Revised Equity Beta 1.35 Cost of Equity 11.56% Debt Ratio 40.0% Equity Ratio 60.0% Revised WACC 8.50% PROBLEM 5-2 a. Cost of Equity b. WACC c. Note: This analysis pre of debt financing is "s that it varies in a dis the firm's bond rating. even though the firm ha of financial leverage f cost of debt (and the d change.bOn the other ha equity does change sinc leverage implies a high
Problem 5-2PROBLEM 5-2GivenSolution LegendDebt Ratio
(current)30.0%= Value given in problemEquity Ratio (current)70.0%=
Formula/Calculation/Analysis requiredCost of Debt6.0%= Qualitative
analysis or Short answer requiredMarket Risk Premium5.25%= Goal
Seek or Solver cellEquity Beta1.20= Crystal Ball InputDebt
Beta0.29= Crystal Ball OutputRisk Free Rate4.5%Corporate Tax
Rate0.35Solutiona. Cost of Equity10.80%b. WACC8.73%c.Unlevered beta
(current debt levels)0.94Revised Equity Beta1.35Cost of
Equity11.56%Debt Ratio40.0%Equity Ratio60.0%Revised WACC8.50%
Note: This analysis presumes that the cost of debt financing is
"sticky" in the sense that it varies in a discrete fashion with the
firm's bond rating. In other words, even though the firm has
increased its use of financial leverage from 35 to 40% the cost of
debt (and the debt beta) do not change.bOn the other hand, the cost
of equity does change since the higher leverage implies a higher
equity beta.
