Question: ABC Co. is trying to estimate its optimal capital structure. The company has a structure that consists of 25 percent debt and 75 percent equity,

ABC Co. is trying to estimate its optimal capital structure. The company has a structure that consists of 25 percent debt and 75 percent equity, based on market values. The risk free rate is 5 percent and the market risk premium is 8 percent. Currently the company's cost of equity which is based on CAPM, is 12 percent and its tax rate is 40 percent. What would ABC Co's estimated cost of equity if it were to change its capital structure to 40 percent debt and 60 percent equity?

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