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Calculate the levered beta and use the capm

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In question 3, we examined the impact of debt on firm value by adding the PV of tax shields. However, we ignored the financial distress costs, which can be substantial when there is a large amount of debt. We can incorporate the financial distress costs and evaluate the optimal capital structure by using the WACC as the debt increases. The WACC consists of the cost of equity plus the after-tax cost of debt. As you add more debt to the firm's capital structure, the equity becomes levered, and we can calculate the levered beta and use the CAPM to calculate the equity cost.

Reference no: EM133206321

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