We want to determine cost of equity for Firm A. We know that Firm A's target debt-to-equity ratio is 1.50. We also know that there is a comparable firm which has exactly same lines of business and therefore is expected to have the same level of business risk as Frim A. The equity beta of the comparable firm is known to be 1.80.
The market value of equity and the market value of debt of the comparable firm are $400 million and $200 million, respectively. The corporate tax rate is 20%. Based on the information given, answer following questions.
(a) What would be your estimate of equity beta for Frim A?
(b) If you find that equity beta is different between Frim A and its comparable firm in (a), how would you explain the difference? If you expect no difference explain why they are not different.