1. What is the current equity cost of capital? 2. If the rm changes its capital structure...

1. What is the current equity cost of capital? 

2. If the firm changes its capital structure as proposed. what would be the new equity cost of capital? 

3. What is the new Weighted Average Cost of Capital?

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The market value of Rumbers Inc is currently 78.0% in equity and 22.0% in debt. An analyst finds the following information about the firm: • It's current WACC is 12.0% • marginal corporate tax rate is 44.0% • the yield to maturity on its outstanding bonds is 8.2% and is expected to remain constant • the risk-free rate is 3.0%, and • the expected return on the market portfolio is 9.5% Rumbers proposes to change its capital structure through a debt for equity swap. Under this proposal its new debt to equity ratio will be 55.0% over 45.0%. The market value of Rumbers Inc is currently 78.0% in equity and 22.0% in debt. An analyst finds the following information about the firm: • It's current WACC is 12.0% • marginal corporate tax rate is 44.0% • the yield to maturity on its outstanding bonds is 8.2% and is expected to remain constant • the risk-free rate is 3.0%, and • the expected return on the market portfolio is 9.5% Rumbers proposes to change its capital structure through a debt for equity swap. Under this proposal its new debt to equity ratio will be 55.0% over 45.0%.

Answer rating: 100% (QA)

To calculate the current equity cost of capital we can use the Capital Asset Pricing Model CAPM Equi... View the full answer