Problem
Clock's Corp is a privately held company and you have been asked to estimate its cost of equity. You identify ABC Inc as a publicly traded peer company with a beta of 1.2. ABC Inc is currently 60% funded by debt, 40% by Equity and its marginal tax rate is 25%. The risk-free rate is 3% and the market-risk premium is 7.5%. If Clock's Corp is only 20% funded by debt and its marginal tax rate is also 25%, answer the following question:
• What's Clock's Corp's beta?
• Using CAPM, what is the cost of equity for Clock's, based on the beta you found?