Keyboard Chiropractic Clinic produces $300,000 of cash fl ow each year. The firm has no debt outstanding,

Question:

Keyboard Chiropractic Clinic produces $300,000 of cash fl ow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to repurchase $600,000 of its equity by borrowing $600,000 at a rate of 8 percent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Keyboard after it changes its capital structure. Assume that the Modigliani and Miller Proposition 1 assumptions hold.

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...

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