Final answer:
To find DELL INC's market risk and cost of equity, we use the Hamada equation to adjust LLED INC's beta for DELL's capital structure, and then apply the Capital Asset Pricing Model (CAPM) using the risk-free rate and market risk premium.
Step-by-step explanation:
The student's question pertains to the calculation of a company's cost of equity using the Hamada equation, which is applied in corporate finance. Given that DELL INC has a debt ratio of 30% and is believed to have the same market risk as LLED INC which has a debt ratio of 60% and a cost of equity of 10%, we can calculate DELL's cost of equity taking into account the market risk premium, the risk-free rate, and the corporate tax rate.
The Hamada equation is:
Beta levered = Beta unlevered * (1 + (1 - Tax rate) * (Debt/Equity))
To find the unlevered beta (market risk) for DELL, we need to first calculate it for LLED, which can be done by rearranging the Hamada equation:
Beta unlevered for LLED = Beta levered for LLED / (1 + (1 - Tax rate) * (Debt/Equity for LLED))
Then using DELL's debt ratio, we can calculate the levered beta for DELL:
Beta levered for DELL = Beta unlevered for LLED * (1 + (1 - Tax rate) * (Debt/Equity for DELL))
Finally, to find the cost of equity for DELL, the Capital Asset Pricing Model (CAPM) is used:
Cost of Equity = Risk-free Rate + Beta levered for DELL * Market risk premium
The detailed calculations would involve substituting the given values into these equations and solving step by step.