Question: Simon software is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consist of 20 percent debt and 80

Simon software is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consist of 20 percent debt and 80 percent equity, based on market value (its D/S ratio is 0.25) The risk-free rate is 6 percent and the market risk premium, rM-rRF 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 Simon estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity?

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