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EpiscoWhat EpiscoWhat
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Posts: 268
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6 years ago
Nielson's equity cost of capital is closest to:
A) 11.3%
B) 12.2%
C) 14.0%
D) 14.4%
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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wrote...
#1
6 years ago
B
Explanation:  B) βu =  βE +  βD
Using the comparable firm βu =  (1.8) +  (0.4) = 0.96
Now plugging in this for Nielson gives us
βu = 0.96 =  (βE) +  (0) → βE = 0.96 × 1.5 = 1.44
Plugging into the CAPM = re = rf + βE(rm - rf) = 5% + 1.44(10% - 5%) = 12.2%
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