You are trying to evaluate a private firm’s potential as a good investment opportunity. Your mentor...

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Finance

You are trying to evaluate a private firm’s potential as a goodinvestment opportunity. Your mentor at the investment bank youinterned during the summer told you to collect information oncomparable firms, which will help you find the WACC of the privatefirm. The private firm has ND/E ratio of 2. The risk free rate is2%. Market risk premium is 5%. Cost of debt for the private firm isassumed is 6%. The tax rate is 50%. The following table lists theinformation you have gathered:
Firm Beta Equity Equity (Million) Debt (Million) Cash (Million)
A 1.3 20 11 6
B 1.1 15 8 2
C 0.9 10 6 3
D 0.8 5 7 2
What is the net debt for firm A?
Q2. Calculate the asset beta for firm D.
Q3. What is the average asset beta you should use combining allthe comparable firms?
Q4. What is the equity beta for the private firm?
Q5. What is the cost of equity for the private firm? 0.0/1.0point (graded) Input the cost of equity for the private firm. ?usethe result from problem 3? ______ %(keep two decimal points)

Firm	Beta Equity	Equity (Million)	Debt (Million)	Cash (Million)
A	1.3	20	11	6
B	1.1	15	8	2
C	0.9	10	6	3
D	0.8	5	7	2

Answer & Explanation Solved by verified expert

4.4 Ratings (618 Votes)

1 Firm A Debt 11 million Cash 6 million Net Debt Debt Cash 11 6 5 million 2 For Firm D Tax Rate 50 Gross Debt 7 million Cash 2 million Net Debt Gross Debt Cash 7 2 5 million Equity 5 million Debt to See Answer

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