Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows: Firm Equity Beta Debt-Equity Ratio Aay 1.4 2 Bee 1.2 1.8 Cee 1.1 1.5 (a) What is the average asset beta of the three firms Aay, Bee, and Cee? (b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows: Firm Equity Beta Debt-Equity Ratio Aay 1.4 2 Bee 1.2 1.8 Cee 1.1 1.5 (a) What is the average asset beta of the three firms Aay, Bee, and Cee? (b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 21P
Related questions
Question
Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows:
Firm
Equity Beta
Debt-Equity Ratio
Aay
1.4
2
Bee
1.2
1.8
Cee
1.1
1.5
(a) What is the average asset beta of the three firms Aay, Bee, and Cee?
(b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning