Reference no: EM13843849
Finance
1. Give debt and firm value figure and ask to draw equity value.
2. Find the CAPM beta of the following stock, where RE is stock return, R ¯M is market return, R ¯E is average of stock returns, R ¯M is average of market returns, COV(RE, RM) is covariance between RE and RM, and VAR(RM) is variance of market returns.
CAPM beta = COV(RE, RM) / VAR(RM)=
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Year
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RE
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RE-R ¯E
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RM
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RM-R ¯M
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(RE-R ¯E) *
(RM-R ¯M)
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(RM-R ¯M)2
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1
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0.2
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-0.2
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2
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-0.2
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0.2
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3
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0.4
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0.4
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4
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-0.4
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-0.4
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R ¯E =
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R ¯M =
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COV(RE, RM)=
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VAR(RM)
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3. Currently, Hotel X has no debt (i.e., leverage=0). The CEO of Hotel X considers increasing leverage (=debt/(debt+equity)) 0.4. Currently, Hotel X's CAPM beta is 1.5. The cost of debt (RD) will be 10%, riskfree rate (RF) is 1%, and market return (RM) is 11%. Assume that the corporate tax rate (τ) is ZERO. Your task, as the CFO of Hotel X, is to provide the cost of capital under this proposed capital structure (i.e., 40% leverage).
3-1. The method to compute the cost of capital is called (____________________) cost of capital.
3-2. What is the CAPM beta under the proposed capital structure (i.e.,40% leverage)?
βE=[(D+E)/E] βA=
3-3. What is the cost of equity under proposed capital structure (i.e., 40% leverage)?
R_E=RF+βE (RM-RF )=
3-4. What is the cost of capital under the proposed capital structure (i.e., 40% leverage)?
RWACC=(1-τ) RD [D/(D+E)]+RE [E/(D+E)]=
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