ChocolateCookie Inc is a private firm. You collected information about its competitors and calculated the weighted average of the unlevered betas of competitors to be 1.08. You also estimated the value of equity of ChocolateCookie to be $50 million, and the only debt the company has is a loan from the bank of $10 million. Tax rate is 21%. What is your estimate of the ChocolateCookie's equity beta?

Question

Lyla Valenzuela

Business

11 December, 20:47

ChocolateCookie Inc is a private firm. You collected information about its competitors and calculated the weighted average of the unlevered betas of competitors to be 1.08. You also estimated the value of equity of ChocolateCookie to be $50 million, and the only debt the company has is a loan from the bank of $10 million. Tax rate is 21%. What is your estimate of the ChocolateCookie's equity beta?

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1.25

Explanation:

The Capital Asset Pricing model will be used

ße = ßa * [Ve + Vd (1 - T) ] / Ve

Here

ße = 1.08

Ve = Value of equity $50 million

Vd = Value of debt $10 million

T is tax rate which is 21%.

By putting the values, we have:

ße = 1.08 * [50 + 10 (1 - 21%) ] / 50

ße = 1.25

The beta equity of Chocolate Cookie is 1.25 which shows higher risk than average risk.