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Calculate the company asset beta and return on asset

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Reference no: EM133145728

Question - This question has two parts. Show all calculations.

a. Rose Ltd currently has no debt. The company's cost of equity is 12.5% p.a. and its Earnings Before Interest and Taxes (EBIT) is expected to be $200,000 p.a. forever. Rose Ltd is planning to raise $500,000 by a debt issue to buy back and cancel an equivalent value of ordinary shares, thereby reducing the share capital. The company tax rate is 30%. Calculate the market value of the company when Rose Ltd has no debt (current structure) and after Rose Ltd Issued debt (expected structure).

b. Cosmos Ltd has a debt ratio (total debt divided by total value of the company) of 0.42 and an equity beta of 1.6. The risk-free rate is 4% p.a. and the market risk premium is 8% p.a. Cosmos Ltd does not pay tax. Calculate the company's asset beta and return on asset. (Show answer correct to 3 decimal places.)

Reference no: EM133145728

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