Q Magnetic materials is an unlevered firm. Its current beta is 1.2. The expected market rate of

Question:

Q Magnetic materials is an unlevered firm. Its current beta is 1.2. The expected market rate of return is 15 % and the risk free rate is 8%. MM is considering two other capital structure policies in addition the current one. The first alternative would use 20% debt at an after tax cost of 9%, which will increase its beta to 1.4. The second alternative would use 40% debt at an after tax cost of 9 .6%, which will increase beta to 1.6. Which of the three capital structures should MM adopt?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...