Question: ABC Inc is a pure equity firm Firm decides to

ABC Inc is a pure equity firm. Firm decides to recapitalize to take advantage of tax shield. Firm's marginal tax rate is 40%. After a substantial borrowing, firm's cost of equity goes up to 10%. Assuming that firm's asset beta is 0.9, risk free rate is 2%, and EMRP is 5%, firm's post recapitalization debt ratio is closest to:
A) 42%
B) 129%
C) 72%
D) 56%
E) None of the above

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  • CreatedSeptember 19, 2013
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