What will be the cost of equity if capital structure changed?
Not what you're looking for?
Cost of Equity if Capital Structure changed to 50/50?
Current capital structure: 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.)
The risk-free rate is 6 percent and the market risk premium, rM - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent.
What would be the Company's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity?
Purchase this Solution
Solution Summary
The solution determines a company`s estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity.
Solution Preview
CAPM says
rS=rRF+Equity Beta*rM-rRF)
We have rS=12%
rM-rRF=5%
rRF=6%
hence, 12%=6%+Equity ...
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Basics of corporate finance
These questions will test you on your knowledge of finance.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media