A company currently has a capital structure consisting of 30% debt, and 70% equity. However the company CFO has suggested that the firm increase its debt ratio to 50%. The current risk free rate is 6% and the market risk premium is 5% while the beta is 1.30.
If the firm tax rate is 40%, what would the beta of an all-equity firm be if it operation were exactly the same? What would if be if this company raises its debt ratio to 50%? What would its cost of equity change?
Please provide a spread sheet with explaining process.© BrainMass Inc. brainmass.com June 3, 2020, 11:04 pm ad1c9bdddf
Please see the Excel file attachment.
Beta of the all equity firm would be the unlevered beta
Unlevered beta = Levered ...
The solution explains how to calculate levered and unlevered beta.