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Unlevered equity betas of each of these companies

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Question: You need to estimate the equity beta for Golden Clothiers, Inc. Golden's debt-to-equity ratio is 85%, and its debt beta is 0.25. The following table shows the betas, debt betas and debt-to-equity ratios for three comparable clothing retailers (all taken from finance.yahoo.com). Assume the tax rate is 30% for all four firms. Please show your work and clearly label your answers.

Company

Beta

D/E Ratio

Debt Beta

TJ Maxx

1.68

0.25

0.3

New York & Co

2.14

0.16

0.3

Express, Inc

1.23

0.28

0.3
  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 Clothiers levered equity beta?
  3. The current risk-free rate is 1.8% and the current return on the market is 9.3%. If Golden's before-tax cost of debt is 5.42% and it has no preferred stock in its capital structure, what is Golden's weighted average cost of capital?

Reference no: EM131473957

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