DCF & WACC
Worked example: a comp has a levered beta of 1.20, D/E of 0.50, and a 25% tax rate. Unlever it, then relever at a target D/E of 0.80 and compute the cost of equity with a 4% risk-free rate and 5% ERP.
Model answer
Step 1 - unlever: Unlevered beta = 1.20 / [1 + (1 - 0.25) x 0.50] = 1.20 / [1 + 0.375] = 1.20 / 1.375 = 0.873. Step 2 - relever at the target's structure: Levered beta = 0.873 x [1 + 0.75 x 0.80] =…
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