Question: The asset beta for a particular industry is 0.75. Use Equation 9.6 to estimate the equity betas for the following three firms based on their respective debt ratios and tax rates. Then calculate each firm's cost of equity assuming an expected market premium of 8% and a risk-free rate of 3%.
Firm A: 55% debt ratio and 25% tax rate
Firm B: 25% debt ratio and 35% tax rate
Firm C: 70% debt ratio and 45% tax rate
Calculate:
1. Beta (Firm A), to four decimal places
2. Beta (Firm B), to four decimal places
3. Beta (Firm C), to four decimal places
4. Discount Rate (Firm A), to three decimal places
5. Discount Rate (Firm B), to three decimal places
6. Discount Rate (Firm C), to three decimal places