Question - Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6 If the risk-free rate is 5.5% and the market risk premium is 6% how much is the additional premium that Ethier's shareholders require to be compensated for financial risk?
Given Data:
Unlevered Beta: 1.00
Levered Beta: 1.60
Risk-Free Rate: 5.50%
Market Risk Premium: 6.00%
Debt 50%
Equity 50%
Step 1: Calculate the Required Return if the company had no debt: (Input data and appropriate formula in the answer cell)
Step 2: Calculate the Required Return if the company has debt: (Input data and appropriate formula in the answer cell)
Step 3: Calculate the extra premium for taking on financial risk: (Include an explanation of how varying degrees of financial risk may command variations in shareholder return expectations)