Question: IN EXCEL SPREADSHEET Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a capital structure that consists of 50

IN EXCEL SPREADSHEET

Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a

capital structure that consists of 50 percent debt and 50 percent equity, based on

market values. (Its D/S ratio is 1.00) The risk-free rate is 6 percent and the market risk

premium, KM - KRF, is 5 percent. Currently the company's cost of equity, which is based

on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Mass Inc.'s

estimated cost of equity if it were to change its capital structure to 70 percent debt and

30 percent equity?

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