Business, 12.02.2021 16:20 beesbutterflyqueen

Part-A Swat Ceramics Limited is engaged in manufacturing of ceramic tiles and allied products.
The firm has capital structure of 25% debt and 75% equity. The company is planning to
raise the level of debt in its capital structure and would like to estimate the impact of this
change on its cost of equity. Currently the company’s cost of equity, which is based on
CAPM, is 12.0%. The tax rate is 40%. The risk free rate is 5.5% and the market risk
premium is 4.5%. If the company raises its level of debt from the current level to 45%
debt and 55% equity, then what would be the estimated cost of equity of the company?
[5 Marks]
Part-B
Explain the term “BETA” in context of cost of equity of a company?

Answers: 1

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Part-A Swat Ceramics Limited is engaged in manufacturing of ceramic tiles and allied products.