hi! im confused about question 2 & 3 in this homework assignment... see attached...... 2. (20pts) Careful analysis of Buckeye's strategy, its markets and its dependence on outside sources of funding, software writers, customers, etc., suggests prudent worst case interest coverage (i.e., coverage that would not significantly impair operations) for Buckeye is 3. Under these circumstances, Buckeye should be able to borrow at a long-term interest rate of about 8.0%per year. What debt to total capital ratio is appropriate for financing the purchase of BCI? At the beginning of 2006, the rate of interest on risk free 30-day treasury bills is 4.8%. The yield on 30-year treasury bonds is 6.2%. The stock of companies which have only negligible debt and produce high performance computers are trading at price-earnings multiples (price to most recent earnings) of about 12 and have equity beta?s of 1.0. Buckeye itself has a beta of 1.05 and a price-earnings ratio of 11.7. 3. (20pts) What is the appropriate beta for Buckeye post-purchase? What is the beta-based estimate of the cost of equity capital for the purchase of Buckeye? What is Buckeye's weighted average cost of capital, i.e., the discount rate for evaluating the purchase? Explain your calculations.
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