Lonestar Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60,...

 

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Lonestar Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, before tax cost of debt is currently at 10%, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and she is considering moving to a capital structure with 40% debt and 60% equity with before tax cost of debt 6%. The risk-free rate is 5.0% and the market total return is 11%. By how much would the weighted average cost of capital change due to this shift in capital structure? Lonestar Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, before tax cost of debt is currently at 10%, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and she is considering moving to a capital structure with 40% debt and 60% equity with before tax cost of debt 6%. The risk-free rate is 5.0% and the market total return is 11%. By how much would the weighted average cost of capital change due to this shift in capital structure?

Answer rating: 100% (QA)

Current Capital Structure Weight of debt wdold 80 Weight of equity weold 20 Beforetax cost of debt r... View the full answer