You are an analyst doing research on Continental Resources (ticker CLR), an oil driller. CLR’s debt-to-equity ratio is 3/7. The firm’s cost of debt is 3.5% and cost of equity is 13%. Assume that the risk-free rate is 3% and the market risk premium is 5%.
What is the firm’s current equity beta? What is the firm’s current debt beta?
A.1.5, 0.1
B.1.5, 0.2
C.2.0, 0.1
D.2.0, 0.2
What is the firm’s unlevered equity beta? (i.e. what is the firm’s equity beta if the firm were financed 100% by equity?)
A.1.25
B.1.43
C.2.76
D.1.52
CLR plans to permanently ramp up its debt-to-equity ratio in order to take advantage of the tax shield. After raising a substantial amount of bank debt, CLR will have a debt-to-equity ratio of 1. What would be the firm’s new equity beta?
A.1.25
B.1.43
C.2.76
D.1.52
What is the new cost of equity?
A.16.8%
B.18.6%
C.13.0%
D.15.6%