Question

Helen is trying to determine Jackson Inc's cost of equity. Jackson has no stock trading data...

Helen is trying to determine Jackson Inc's cost of equity. Jackson has no stock trading data available, so Helen wants to look at Jackson’s publicly traded industry peer to get an estimate for her company’s asset beta. Helen found one publicly traded industry peer that has same assets as Jackson Inc. The peer has an equity beta of 1.5 and a Debt/(Debt + Equity) ratio of 20%. Jackson Inc is 100% equity funded. Corporate tax rate is 30% for both companies.

(i) Assume debt beta = 0 for both Jackson Inc. and its publicly traded industry peer. What is Jackson’s asset beta based on the information given above about its publicly traded industry peer? (3 pt)

(ii) The risk-free rate is 3% and the market risk premium is 5%. What is Jackson Inc's cost of equity? (2 pt)

(iii) Continue from (i) & (ii), what is Jackson Inc's (a) equity beta and (b) cost of equity if the company changes its capital structure from 100% equity to 40% debt and 60% equity, assuming debt beta = 0? (5 pt)

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
c. Judy Chen is the primary portfolio manager of the global equities portfolio at Horizon Asset...
c. Judy Chen is the primary portfolio manager of the global equities portfolio at Horizon Asset Management. Lars Johansson, a recently hired equity analyst, has been assigned to Chen to assist her with the portfolio. Chen asks Johansson to evaluate Twin Industries, a privately owned U.S. company that may initiate a public stock offering. Johansson decides to use CAPM to estimate the required return on equity for Twin Industries. Johansson identifies a publicly traded peer company with an estimated equity...
SAIPA Corp. is a publicly-traded company that specializes in car manufacturing. The company’s debt-to-equity ratio is...
SAIPA Corp. is a publicly-traded company that specializes in car manufacturing. The company’s debt-to-equity ratio is 1/4, the cost of debt is 7%, and its equity beta is 1.5. The risk-free rate is 5%, the market risk premium is also 5%, and the corporate tax rate is 40%. Suppose SAIPA is considering the possibility of getting into speed boat manufacturing business. It plans to finance this new project equally with debt and equity. The cost of debt for the new...
Lister Inc. is a small, publicly traded data processing company that has $200 million in debt...
Lister Inc. is a small, publicly traded data processing company that has $200 million in debt outstanding, in both book value and market value terms. The book value of equity in the company is $400 million and there are 40 million shares outstanding, trading at $20/share. The current levered beta for the company is 1.15 and the company’s pre-tax cost of borrowing is 5%. The current risk-free rate in US $ is 3%, the equity risk premium is 5% and...
Lister Inc. is a small, publicly traded data processing company that has $200 million in debt...
Lister Inc. is a small, publicly traded data processing company that has $200 million in debt outstanding, in both book value and market value terms. The book value of equity in the company is $400 million and there are 40 million shares outstanding, trading at $20/share. The current levered beta for the company is 1.15 and the company’s pre-tax cost of borrowing is 5%. The current risk-free rate in US $ is 3%, the equity risk premium is 5% and...
. You are trying to estimate the cost of capital to use in assessing a new...
. You are trying to estimate the cost of capital to use in assessing a new investment venture in the entertainment business, for TechSmith Inc, a publicly traded electronics company. You have been provided the following information:             • The beta for TechSmith, based upon stock prices for the last 5 years, is 1.65 but the unlevered beta for entertainment companies is 1.08.             • At the moment, TechSmith has one bank loan outstanding, with a principal payment due of...
Sinaloa Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the...
Sinaloa Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the company’s beta. You have obtained the following equity betas for publicly traded firms that also manufacture home appliances. ($ millions) Firm Beta Debt Market Value of Equity iRobot 0.90 $0 $ 3,040 Middleby's 1.85 750 7,430 National Presto 0.10 0 805 Newell Brands 1.05 11,923 26,370 Whirlpool 1.75 4,500 13,980 a. Estimate an asset beta for Sinaloa Appliance.
Suppose Visa Inc.​ (V) has no debt and an equity cost of capital of 8.8 %....
Suppose Visa Inc.​ (V) has no debt and an equity cost of capital of 8.8 %. The average​ debt-to-value ratio for the credit services industry is 13.4 %. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6.4 %​?
M&M Enterprises is a publicly traded company. It currently has 50 million shares trading at $20/share...
M&M Enterprises is a publicly traded company. It currently has 50 million shares trading at $20/share and $250 million in book value of equity. The firm also has book value of debt of $ 75 million and market value of debt of $ 100 million. The firm also has operating lease commitments, 30 million in each of the next 10 years. The cost of equity for the company is 12%, the pre-tax cost of debt is 4% and the marginal...
JG Enterprises has 50 million shares, trading at $4 a share; the cost of equity is...
JG Enterprises has 50 million shares, trading at $4 a share; the cost of equity is 12%. It has debt with a market value of $ 100 million and a pre-tax cost of debt of 6%. Finally the company has $100 million in market value of preferred stock; the preferred shares are trading at $80 a share, with an annual preferred dividend of $6/share. If the marginal tax rate is 40%, estimate the cost of capital for the firm a....
The ABC. Inc . has 2.8 million shares of stock outstanding . The stock currently sells...
The ABC. Inc . has 2.8 million shares of stock outstanding . The stock currently sells for $20 per share . The firm debt publicly traded and was recently quoted at 94% of face value . It has a total face value of $ 10 million and it is currently priced to yield 10% .The risk -free rate is 8% and the market risk premium is 7% . You have estimated that the company has a beta of 0.74 ....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT