You need to estimate the equity beta for Golden Chemical, Inc. Golden's debt-to-asset ratio is 20%, and its debt beta is 0.25. The following table shows the betas, debt betas and debt-to-equity ratios for three comparable chemical firms (all taken from finance.yahoo.com). Assume the tax rate is 40% for all four firms. Please show your work and clearly label your answers.
|
Company
|
Beta
|
D/E Ratio
|
Debt Beta
|
|
Eastman Chemical
|
1.45
|
0.75
|
0.3
|
|
Celanese Corp
|
1.28
|
0.82
|
0.3
|
|
Dow Chemical
|
2.56
|
0.96
|
0.3
|
1. Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.
2. Assuming debt is risk-free, what is your estimate of Golden Chemical's levered equity beta?
3. The current risk-free rate is 2.4% and the current market risk premium is 7.53%. If Golden's before-tax cost of debt is 6.8% and it has no preferred stock in its capital structure, what is Golden's weighted average cost of capital?