Question

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)

Answer #1

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Debt
Market Value of Equity
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$0
$
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0
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