Question 3 [10 Total Marks] Amazonia SA operates in two segments via two different subsidiaries: Wood & Paper. Amazonia

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Question 3 10 Total Marks Amazonia Sa Operates In Two Segments Via Two Different Subsidiaries Wood Paper Amazonia 1 (122.2 KiB) Viewed 56 times

Question 3 [10 Total Marks] Amazonia SA operates in two segments via two different subsidiaries: Wood & Paper. Amazonia has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Amazonia has outstanding 10-year bonds with yield to maturity of 10% and a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 60% % in case of default. The risk-free rate is 4% and the market equity risk premium is 10%. You are further provided with the following information on comparable firms: Sector Median Beta Median D/E ratio 40% 60% Median tax rate 45% 35% Wood Paper 1.20 1.00 a) Calculate Amazonia's Levered Beta. [5 Marks] b) Calculate Amazonia's WACC (Weighted-Averaged Cost of Capital). [5 Marks]