Based on the information from Question 42 ~ 44, what would be the company's new cost of equity if it were to change its capital structure to 50% debt and 50% equity (D/S =1.0) using the CAPM?

13.8%

15.6%

16.8%

18.5%

Step 2 42) Calculation of current leveraged beta using the CAPM: Ke = Rf + Beta (Rm - Rf) Rf = Risk-free rate Rm = Market Return Rf = Risk-free rate 149% = 5% + Beta*6% 0.06 Beta = 0.14 - 0.05 0.06 Beta = 0.09 Beta = 0.09 /0.06 Beta = 1.5 Beta of Levered firm = 1.5 Step 3 43) Calculation of firm's unleveraged beta: Unleveraged beta = Leveraged beta / 1+ (1-Tax rate) (D/E) =1.5(From above) / 1+ (1-0.2) (0.25) = 1.5 / 1.2 = 1.25 Unleveraged beta = 1.25Step 4 44) New Leveraged beta: By = By [ 1+ (1 - Tax Rate) (D/E)] = 1.25 [ 1- (1-0.2)(1)] = 1.25 [ 1.8] = 2.25 New Leveraged Beta = 2.25