A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will pay expected dividends of $2 million every year perpetually, and debt of maturity 10 years that will pay expected coupons of $3 million annually (6% of face value of $50 million). The equity is discounted at a rate of 10.86% annually, and the debt is discounted a rate of 6% annually.

 

In the second capital structure the firm will issue equity which will pay expected dividends of $4 million every year perpetually, and debt of maturity 10 years that will pay coupons of $1 million annually (8% of face value of $12.5 million). The debt is discounted a rate of 8% annually. 

What is the rate of discount for equity in CS2?

Answer rating: 100% (QA)

To determine the rate of discount for equity in capital structure CS2 we need to compare the expe... View the full answer