Part 2 (Continuation) Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure.(Hint: Find the firm's new cost of equity given the new levered beta) *

Part 2 (Continuation) Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure.(Hint: Find the firm's new cost of equity given the new levered beta) *

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 2STP

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