The market value of Rumbers Inc is currently 80.0% in equity and 20.0% in debt. An...

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The market value of Rumbers Inc is currently 80.0% in equity and 20.0% in debt. An analyst finds the following information about the firm: Its current WACC is 13.0% marginal corporate tax rate is 28.0% • the yield to maturity on its outstanding bonds is 8.2% and is expected to remain constant the risk-free rate is 3.0%, and • the expected return on the market portfolio is 9.5% Rumbers proposes to change its capital structure through a debt for equity swap. Under this proposal its new debt to equity ratio will be 50.0% over 50.0%. a) What is the current equity cost of capital? % (Give answer as % to 2 decimal places) b) If the firm changes its capital structure as proposed, what would be the new equity cost of capital? % (Give answer as % to 2 decimal places) The market value of Rumbers Inc is currently 80.0% in equity and 20.0% in debt. An analyst finds the following information about the firm: Its current WACC is 13.0% marginal corporate tax rate is 28.0% • the yield to maturity on its outstanding bonds is 8.2% and is expected to remain constant the risk-free rate is 3.0%, and • the expected return on the market portfolio is 9.5% Rumbers proposes to change its capital structure through a debt for equity swap. Under this proposal its new debt to equity ratio will be 50.0% over 50.0%. a) What is the current equity cost of capital? % (Give answer as % to 2 decimal places) b) If the firm changes its capital structure as proposed, what would be the new equity cost of capital? % (Give answer as % to 2 decimal places)

Answer rating: 100% (QA)

a To find the current equity cost of capital we can use the WACC formula WACC EV Re DV Rd 1 T where ... View the full answer