ChemCo has an 8% debt cost of capital and a 15% equity cost of capital. CemCo’s debt has a market value of $500 million in perpetual bonds with a promised yield of 10%. Currently there are 10 million shares outstanding, each valued at $50. The risk-free rate is 4% and expected return on the market portfolio is 12%.
Assume that the MM assumptions hold (i.e., no taxes, no costs of financial distress) and calculate the following quantities:
a) Equity and Debt Beta
b) Return on Assets and Asset Beta