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BaLLatris [955]
2 years ago
9

ChocolateCookie Inc is a private firm. You collected information about its competitors and calculated the weighted average of th

e unlevered betas of competitors to be 1.08. You also estimated the value of equity of ChocolateCookie to be $50 million, and the only debt the company has is a loan from the bank of $10 million. Tax rate is 21%. What is your estimate of the ChocolateCookie's equity beta?
Business
1 answer:
kvv77 [185]2 years ago
8 0

Answer:

1.25

Explanation:

The Capital Asset Pricing model will be used

ße = ßa × [Ve + Vd(1 – T)] / Ve

Here

ße = 1.08

Ve = Value of equity $50 million

Vd = Value of debt $10 million

T is tax rate which is 21%.

By putting the values, we have:

ße = 1.08 × [50 + 10(1 – 21%)] / 50

ße = 1.25

The beta equity of Chocolate Cookie is 1.25 which shows higher risk than average risk.

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