The Following Data Pertains to Zonk Corp -
Assume That Zonk Is a Potential Leveraged

question 6

Multiple Choice

The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions) :
$\begin{array}{llcc} \text { Total assets } &\$6,840 \\ \text { Interest-be aring debt } &\$3,562\\ \text { Average pre-tax borrowing cost } &11.5\%\\ \text {Common equity. } &\\ \text { Book value } &\$2,560\\ \text { Market value } &\$12,850\\ \text { Income tax rate} &35\%\\ \text { Market ecuity beta} &1.24\\\end{array}$
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Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

• A) 1.24
• B) 4.77
• C) 4.34
• D) 3.91

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