Ethier Enterprise has an unlevered beta of 1. Ethier is financed with 35% debt and has a levered beta of 1.3. If the risk free rate is 4.5% and the market risk premium is 5%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.
| we know that required rate on equity using CAPM = Risk free rate + market risk premium * beta | |||||||||
| Cost of equity if there is no debt (using Beta = 1) | |||||||||
| Cost of equity = | =(4.5%+5%*1) | ||||||||
| Cost of equity = | 9.50% | ||||||||
| Cost of equity if there is debt (using Beta = 1.3) | |||||||||
| Cost of equity = | =(4.5%+5%*1.3) | ||||||||
| Cost of equity = | 11.00% | ||||||||
| therefore additional premium required = 11%-9.5% = | 1.50% | ||||||||
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