Given the following information for Boeing Company, calculate the cost of equity

Question

Given the following information for Boeing Company, calculate the cost of equity using Homework3_Problem2_SS.xls; Print and submit the spreadsheet.Risk Free Rate =5.00%Risk Premium of the Market =5.50%current beta of the company =1.25marginal tax rate for the company =35.00%current Debt of the company =$5,000current Equity of the company =$50,000Current debt/equity ratio of the company10.00%1) Calculate unlevered beta, show your work;2) Calculate levered beta at D/E=25%, show your work; ARE171BPage 2 of 33) Calculate cost of equity at D/E=25%, show your work;

Sheet1 Financial Leverage and Cost of Equity These inputs are absolutely essential to the calculation Enter Risk Free Rate- Enter Risk Premium of the Market- Enter the current beta of the company- Enter the marginal tax rate for the company = Enter the current Debt of the company- Enter the current Equity of the company- Current debt/equity ratio of the company 5.00% 5.50% 1.25 35.00% $5,000 $50,000 10.00% Output from the Analysis Unlevered Beta for the firm (based upon average debt/equity ratio) Current Beta for the firm (based upon current debt/equity ratio) - D D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70 00% 80.00% 90.00% DIE Levered Beta Cost of Equity Page 1

Explanation / Answer

Unlevered Beta = Beta (levered) / 1 + (1 - tax rate) x (Debt/Equity). Unlevered Beta = 1.25 / 1 + (1 - 35%) x (10%). 0.076 Levered Beta = Unlevered Beta ( 1 + (1- tax rate) (Debt/Equity )) Levered Beta = .076 ( 1 + (1- 35%) (25%)) 0.011 Cost of Equity = Rf + Beta x MRP Cost of Equity = 5% + .011 x 5.5% 5.06%

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