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You need to estimate the equity beta for Golden Chemical, Inc. Golden's debt-to-asset ratio is 20%, and its debt beta is 0.25. The following table shows the betas, debt betas and debt-to-equity ratios for three comparable chemical firms (all taken from finance.yahoo.com). Assume the tax rate is 40% for all four firms. Please show your work and clearly label your answers.
Company
Beta
D/E Ratio
Debt Beta
Eastman Chemical
1.45
0.75
0.3
Celanese Corp
1.28
0.82
Dow Chemical
2.56
0.96
1. Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.
2. Assuming debt is risk-free, what is your estimate of Golden Chemical's levered equity beta?
3. The current risk-free rate is 2.4% and the current market risk premium is 7.53%. If Golden's before-tax cost of debt is 6.8% and it has no preferred stock in its capital structure, what is Golden's weighted average cost of capital?
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