33:390:400 Study Guide - Final Guide: Capital Surplus, Systematic Risk, Net Present Value
Document Summary
Wacc = [. 8 x . 12] + [. 2 x . 07 x (1-0. 4)] = . 1044 or 10. 44% 1044 t = - ,535 reject the project. 0. 0286 (rd - average rd) x (rm - average rm) #3. (a) we first unlever the equity beta of the comparable firm using the formula, Since two firms have the same level of business risk, the asset beta for firm a would be 1. 29 as well. Now we use the same formula again to estimate equity beta of firm a. E = (1+1. 50 x . 80) x 1. 29 = 2. 84 (b) equity beta is higher for firm a than for the comparable firm. The difference is because firm a has a higher debt ratio and therefore has higher financial risk than its comparable firm. If a firm has larger amount of debt, it has to make larger debt payments.
