Corporate finance

pooja923
Good Student
Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

Corporate finance

Postby pooja923 » Sat May 21, 2016 4:42 am


edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

Re: Corporate finance

Postby edupristine » Sat May 21, 2016 5:41 am

Hi Pooja
solution:
Just hink of it as the Dupont formula for beta (Note: the Equity mulitplier is Assets/equity or 1+D/E). Rememebr that ROE is the “Levered” version of ROA.
With ROE and ROA:
ROE = ROA x Equity Multiplier ==>
ROE = ROA x (1 + D/E)
vs. With Levered and Unlevered Beta:
Levered beta = Unlevered beta x [1+D/E(1-t)]
Since we’re talking about debt, there should be a tax adjustment. Hence the D/E is multiplied by “1-t”

JF Black’s asset beta:
βasset = βequity × (1 / (1 + ((1 – t)D/E)))
= 0.7 × (1 / (1 + 0.6(3)))
= 0.25
Utilitarian’s project beta, therefore, is:
β project = βasset × (1 + ((1 – t)D/E))
= 0.25 × (1 + 0.7(2.5)))
= 0.6875
Thus, Utilitarian’s cost of equity for this project is:
rCE = 5% + 0.6875(9% – 5%) = 6.3%
and their WACC is calculated
(2.5/3.5)(7%)(1 – 30%) ) + (1/3.5)(6.3%)
hence the answer is 5.71%

pooja923
Good Student
Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

Re: Corporate finance

Postby pooja923 » Sat May 21, 2016 7:22 am

Thanks alot


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