Answer and Explanation:
The calculation is given below;
For North Pole:
Unlevered Beta = 1.10
Debt = $2,900,000
Equity = $3,800,000
So,
D/E Ratio = Debt ÷ Equity
= $2,900,000 ÷ $3,800,000
= 0.76316
Now
Levered Beta = Unlevered Beta × [1 + (1 - tax) × D ÷ E Ratio]
= 1.10 × [1 + (1 - 0.35) × 0.76316]
= 1.65
Required Return = Risk-free Rate + Levered Beta × (Market Return - Risk-free Rate)
= 3.20% + 1.65 × (10.90% - 3.20%)
= 15.91%
For South Pole:
Unlevered Beta = 1.10
Debt = $3,800,000
Equity = $2,900,000
So,
D/E Ratio = Debt ÷ Equity
= $3,800,000 ÷ $2,900,000
= 1.31034
Now
Levered Beta = Unlevered Beta × [1 + (1 - tax) × D ÷ E Ratio]
= 1.10 × [1 + (1 - 0.35) × 1.31034]
= 2.04
And
Required Return = Risk-free Rate + Levered Beta × (Market Return - Risk-free Rate)
= 3.20% + 2.04 × (10.90% - 3.20%)
= 18.91%