Company A is unlisted and all-equity financed.

12.3, 12.30Company B’s equity beta = 1.6, D:E = 40:60, tax = 20%.Ungear B’s beta to get the asset beta:βA=βE×EE+D(1−T)=1.6×6060+40(1−0.2)=1.6×6060+32=1.6×6092=1.6×1523=2423≈1.04\beta_A = \beta_E \times \frac{E}{E + D(1-T)} = 1.6 \times \frac{60}{60 + 40(1-0.2)} = 1.6 \times \frac{60}{60+32} = 1.6 \times \frac{60}{92} = 1.6 \times \frac{15}{23} = \frac{24}{23} \approx 1.04βA​=βE​×E+D(1−T)E​=1.6×60+40(1−0.2)60​=1.6×60+3260​=1.6×9260​=1.6×2315​=2324​≈1.04 Company A is all-equity, so its equity beta = asset beta = 1.04.Use CAPM:Ke=Rf+β(Rm−Rf)=5%+1.0435×7%≈5%+7.30%=12.3%K_e = R_f + \beta (R_m - R_f) = 5\% + 1.0435 \times 7\% \approx 5\% + 7.30\% = 12.3\%Ke​=Rf​+β(Rm​−Rf​)=5%+1.0435×7%≈5%+7.30%=12.3%

12.3%