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GM 4202 Week 3: Individual Assignment




Question;This is an individual assignment and will be graded. Each student must submithis/her own copy of the assignment and must answer all 5 questions. Pleasetype your answers immediately below each question. Show all necessaryformulas and workings. Submit your assignment via the drop box designated.The following questions are based on the case Midland Energy Resources:1. In Exhibit 5 of the case, current D/E ratio of Midland is given as 0.593. At this D/Eratio, Midlands equity beta (also called levered beta) is 1.25. Find the Asset beta(also called unlevered beta) of Midland given a marginal tax rate of 40%.2. On page 4, Table 1 of the case, it was stated that Midlands overall (consolidated)target debt-to-value ratio is 0.422. Using the unlevered beta in Q1 and a marginal taxrate of 40%, what is the equity beta based on this target debt ratio?3. Given the risk free interest rate of 4.98% and the equity market risk premium(EMRP) of 5%, what is the cost of equity for Midland when the target debt-to-valueratio is 0.422?4. Midland estimates its corporate cost of debt by adding the Treasury spread of 1.62%to the risk free interest rate of 4.98%. At the target debt-to-value ratio is 0.422, whatis Midlands weighted average cost of capital? (Cost of equity can be found in Q3.)5. Midland used competitors data to compute its divisional cost of equity. If the averageunlevered beta for competitors in the Exploration and Production (E&P) division is0.93, and the target debt-to-value ratio (from Table A) for the division is 0.46, what isthe cost of equity for the E&P division? Assume the risk free interest rate is 4.98%,the equity market risk premium (EMRP) of 5%, and a marginal tax rate of 40%.


Paper#48318 | Written in 18-Jul-2015

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