What is the cost of equity under proposed capital structure

Question

Finance

1. Give debt and firm value figure and ask to draw equity value.

2. Find the CAPM beta of the following stock, where R_E is stock return, R ¯M is market return, R ¯_E is average of stock returns, R ¯_M is average of market returns, COV(R_E, R_M) is covariance between R_E and R_M, and VAR(R_M) is variance of market returns.

CAPM beta = COV(R_E, R_M) / VAR(R_M)=

Year	RE	RE-R ¯E	RM	RM-R ¯M	(RE-R ¯E) * (RM-R ¯M)	(RM-R ¯M)2
1	0.2		-0.2
2	-0.2		0.2
3	0.4		0.4
4	-0.4		-0.4
		R ¯E =		R ¯M =	COV(RE, RM)=	VAR(RM)

3. Currently, Hotel X has no debt (i.e., leverage=0). The CEO of Hotel X considers increasing leverage (=debt/(debt+equity)) 0.4. Currently, Hotel X's CAPM beta is 1.5. The cost of debt (R_D) will be 10%, riskfree rate (R_F) is 1%, and market return (R_M) is 11%. Assume that the corporate tax rate (τ) is ZERO. Your task, as the CFO of Hotel X, is to provide the cost of capital under this proposed capital structure (i.e., 40% leverage).

3-1. The method to compute the cost of capital is called (____________________) cost of capital.

3-2. What is the CAPM beta under the proposed capital structure (i.e.,40% leverage)?

β_E=[(D+E)/E] β_A=

3-3. What is the cost of equity under proposed capital structure (i.e., 40% leverage)?

R_E=R_F+β_E (R_M-R_F )=

3-4. What is the cost of capital under the proposed capital structure (i.e., 40% leverage)?

R_WACC=(1-τ) R_D [D/(D+E)]+R_E [E/(D+E)]=