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16-2: Business Risk and Financial Rick Problem 16-3 Premium for Financial Ethier Enterprise has an unlevered beta 1. Ethier i
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Answer #1

If the company had no debt, its required return would be:

rs,U = rRF + bU RPM = 6% + 1(5%) = 11.00%

With debt, the required return is:

rs,L = rRF + bL RPM = 6% + 1.4(5%) = 13.00%

Therefore, the extra premium required for financial risk is 13.00% - 11.00% = 2.00%.

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