Debt-to-CapitalEquity-to-Capital Debt-to-EquityBefore-Tax Cost ofRatioRatioRatioBond RatingDebt(Wa)(WC)(D/E)(rd)0.001.000.0000AA5.0%0.250.750.3333A6.00.500.501.0000BBB8.30.750.253.0000BB11.0The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is$500,000 and will not change if debt, at any of the levels shown in the preceding table, is added tothe firm’s capital structure. North Star uses the CAPM to estimate its cost of common equity, . Itestimates that the risk-free rate is 3.5%, the market risk premium is 4.5%, and its tax rate is 25%.North Star’s current beta, which is because it has no debt, is 1.25.Calculate the beta for each of the capital structures shown in the preceding table.(Wa) (W.) (D/E)( rd)0.00 1.000.00005.0%0.25 0.75 0.33336.00.50 0.501.00008.30.75 0.253.0000 11.0Note: enter results with four (4) decimal places
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