Using the Hamada Model, regarding the relation between beta of a levered firm and
the beta of a firm with no debt in its capital structure, calculate the following.
Debt
Equity
If the debt ratio is $W_D = \frac{Debt}{Assets}$ and equity ratio is $W_S = \frac{Equity}{Assets}$,
beta of the firm with leverage is
$b_L = 1.35$, T = 21%, debt ratio= 45%, equity ratio = 55%,
A. Calculate its beta without leverage.
B. Would you consider this as the beta of assets? Why?
C. Suppose the AA quality corporate bond yield is 5%, and the market risk premium
is 7%, calculate the overall cost of capital for this firm based on the capital asset
pricing model CAPM.
D. If the earnings of this firm is $900 mil per year in perpetuity, calculate the value of
the firm.
