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Hello Please Advise Thanksq11 North Star Is Trying To Determine Its

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Debt-to-Capital
Equity-to-Capital Debt-to-Equity
Before-Tax Cost of
Ratio
Ratio
Ratio
Bond Rating
Debt
(Wa)
(WC)
(D/E)
(rd)
0.00
1.00
0.0000
AA
5.0%
0.25
0.75
0.3333
A
6.0
0.50
0.50
1.0000
BBB
8.3
0.75
0.25
3.0000
BB
11.0
The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is
$500,000 and will not change if debt, at any of the levels shown in the preceding table, is added to
the firm’s capital structure. North Star uses the CAPM to estimate its cost of common equity, . It
estimates that the risk-free rate is 3.5%, the market risk premium is 4.5%, and its tax rate is 25%.
North Star’s current beta, which is because it has no debt, is 1.25.
Calculate the beta for each of the capital structures shown in the preceding table.
(Wa) (W.) (D/E)
( rd)
0.00 1.00
0.0000
5.0%
0.25 0.75 0.3333
6.0
0.50 0.50
1.0000
8.3
0.75 0.25
3.0000 11.0
Note: enter results with four (4) decimal placesFinancial Accounting