Riskfree rate is 3%, (ERP) is 5% and firm A’s Beta is 1.5, The expected return (cost of equity) of firm A is 6%. Credit rating company Moody’s rated firm A as a BB rated company and the default spread of BB companies is 2% in general. Firm A’s cost of debt is 5%.
Find the firm value if Firm A has debt that worth market value of $1 million and equity that worth market value of $2 million.
Find the debt ratio of firm A.
Find firm A’s cost of capital.