Question: You need to estimate the equity beta for Golden Clothiers, Inc. Golden's debt-to-equity ratio is 85%, and its debt beta is 0.25. The following table shows the betas, debt betas and debt-to-equity ratios for three comparable clothing retailers (all taken from finance.yahoo.com). Assume the tax rate is 30% for all four firms. Please show your work and clearly label your answers.
|
Company
|
Beta
|
D/E Ratio
|
Debt Beta
|
|
TJ Maxx
|
1.68
|
0.25
|
0.3
|
|
New York & Co
|
2.14
|
0.16
|
0.3
|
|
Express, Inc
|
1.23
|
0.28
|
0.3
|
- Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.
- Assuming debt is risk-free, what is your estimate of Golden Clothiers levered equity beta?
- The current risk-free rate is 1.8% and the current return on the market is 9.3%. If Golden's before-tax cost of debt is 5.42% and it has no preferred stock in its capital structure, what is Golden's weighted average cost of capital?