Consider Optitron Enterprises, a firm that is currently funded entirely with equity. There are 50 million shares outstanding and each share has a current market value of $15. Eric Fredrickson, the CEO, has considered whether the company should take on some debt, as he has learned in his Executive MBA class that some debt can increase shareholder value. Mr. Fredrickson has estimated that the current risk free rate is 1.9% and the expected return on a broad market portfolio is 9%. The company’s marginal tax rate is 40% and its operating beta (also known as unlevered beta) is 0.75. Mr. Fredrickson has contacted an investment banker who has analyzed the firm’s operational risk and financial condition. The investment banker has provided the following schedule of anticipated debt costs at various levels of debt financing. Optitron would use any proceeds from a debt issue to immediately retire outstanding equity by repurchasing shares, also known as a recapitalization. wd rd 0 0.0% 0.20 6.5% 0.40 7.5% 0.60 8.5% 0.80 9.5% 1. Using the Hamada equation, estimate the firm’s beta at each level of debt. 2. Using the CAPM, estimate the firm’s cost of equity at each level of debt.

Answer for the question:

Consider Optitron Enterprises, a firm that is currently funded entirely with equity. There are 50 million shares outstanding and each share has a current market value of $15. Eric Fredrickson, the CEO, has considered whether the company should take on some debt, as he has learned in his Executive MBA class that some debt can increase shareholder value. Mr. Fredrickson has estimated that the current risk free rate is 1.9% and the expected return on a broad market portfolio is 9%. The company’s marginal tax rate is 40% and its operating beta (also known as unlevered beta) is 0.75. Mr. Fredrickson has contacted an investment banker who has analyzed the firm’s operational risk and financial condition. The investment banker has provided the following schedule of anticipated debt costs at various levels of debt financing. Optitron would use any proceeds from a debt issue to immediately retire outstanding equity by repurchasing shares, also known as a recapitalization. wd rd 0 0.0% 0.20 6.5% 0.40 7.5% 0.60 8.5% 0.80 9.5% 1. Using the Hamada equation, estimate the firm’s beta at each level of debt. 2. Using the CAPM, estimate the firm’s cost of equity at each level of debt.

is given in the attachment.

Explanation:

Option c is correct

The business cycle is the periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real gross domestic product (gdp) and other macroeconomic variables. a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. economists note, however, that complete business cycles vary in length. the duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging six years in length. some business analysts use the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. but the term "business cycle" is still primarily associated with larger (industry-wide, regional, national, or even international) business trends.