Value of equity risk premium

[jack93]

This is a simple problem but I think I am missing something.
The question goes as follows:

Fryday plc is ungeared and has a beta of 1.2. Assuming a corporation tax rate of 30%,
what would the beta of the company’s equity shares become if it issued an amount of
debt equal to 50% of its market capitalisation and used the cash raised to repay half of
the existing equity shares?

Geared equity beta = Ungeared Beta × [1 + (Debt:Equity ratio) × (1 )] - t
= 1.2 × [1 + (1)0.7]
= 2.04

Question 15.11
Calculate Fryday plc’s new WACC in a taxed situation, assuming that the new
debt:equity ratio is 1:1 and that the gross cost of debt is 5%.


Now, my question is what is the equity risk premium in this question? I have to use this value to find the cost of equity.
In the solution, it is given as 7% but I can't figure out how they have taken this value.

Can anyone explain?

Thanks
Joel

 

[Margaret Wood]

The risk-free rate and the equity risk premium were given in Question 15.10 on page 24.

Is this OK now or were you asking why do we use this rate for the equity risk premium?

 

[jack93]

Oh.... that answers my question.. I was just looking for the rate.

Thanks for the answer

Regards,
Joel