49. ABC Company is trying to establish its optimal capital structure. Currently, its capital structure consists of 25% debt and 75% equity; however, the CEO believes that the company should use more debt. The risk-free rate is 5%, the market risk premium is 6% and the tax rate is 40%. The company's cost of equity is 14% currently determined using the CAPM. The company changed its capital structure to 50% debt and 50% equity. The beta before the change in capital structure is determined to be 1.5 while the unlevered beta is 1.25.What would be its cost of equity if the change in capital structure is effected? [nearest percent]

49. ABC Company is trying to establish its optimal capital structure. Currently, its capital structure consists of 25% debt and 75% equity; however, the CEO believes that the company should use more debt. The risk-free rate is 5%, the market risk premium is 6% and the tax rate is 40%. The company's cost of equity is 14% currently determined using the CAPM. The company changed its capital structure to 50% debt and 50% equity. The beta before the change in capital structure is determined to be 1.5 while the unlevered beta is 1.25.What would be its cost of equity if the change in capital structure is effected? [nearest percent]

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 7P

See similar textbooks

Similar questions

The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.a) What is Millennium’s WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?
A company is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, the company’s cost of equity is 14%, which is determined by the CAPM. What would be the companies estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps.
The firm has capital structure of 25% debt and 75% equity. The company is planning to raise the level of debt in its capital structure and would like to estimate the impact of this change on its cost of equity. Currently the company’s cost of equity, which is based on CAPM, is 12.0%. The tax rate is 40%. The risk free rate is 5.5% and the market risk premium is 4.5%. If the company raises its level of debt from the current level to 45% debt and 55% equity, then what would be the estimated cost of equity of the company
Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Lucky’s cost of equity is 14%, which is determined by the CAPM. What would be Lucky’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? What would be Lucky’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Based on cost of equity estimations, should the firm change its capital structure? if yes, which point is optimal if the target is to minimize the cost of equity of the firm?
Hardware Co. is estimating its optimal capital structure. Hardware Co. has a capital structure that consists of 80% equity and 20% debt and a corporate tax rate of 40%. Based on the short-term treasury bill rates the risk-free rate is 6% and the market return is 11%. Hardware Co. computed its cost of equity based on the CAPM – 12%. The company will shift its capital structure to 50% debt and 50% equity funded.What would be Hardware Co.’s estimated cost of equity if it will shift its capital structure to 50% debt and 50% equity funded?