Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity? (Just calculate the change in the cost of equity). A. -5.20% B. -6.36% C. -7.69% D. -6.99% E. -5.65%

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity? (Just calculate the change in the cost of equity). A. -5.20% B. -6.36% C. -7.69% D. -6.99% E. -5.65%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 24P

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Similar questions

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, it has a beta of 1.60, and its tax rate is 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk - free rate is 5.0% and the market risk premium is 6.0%. By how much would the firm's cost of equity change as a result of altering its capital structure?
Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRFrRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm s tax rate is 40%. Currently, the cost of equity, rsrs, is 11.5% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?
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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.1. What would be Lucky’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity?2. What would be Lucky’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?3. 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?
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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.