Sparkle Co. is trying to estimate its optimal capital structure. Right now, the company has a capital
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Sparkle Co. is trying to estimate its optimal capital structure. Right now, the company has a capital structure that consists of 20% debt and 80% equity. (Its D/E ratio is 0.25.) The risk-free rate is 6% and the market risk premium is 5%. Currently the company’s cost of equity is 12% and its tax rate is 40%.
What would be the company estimated cost of equity if it were to change its capital structure to 40% debt and 60% equity?
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