You noticed that your firms debt has an overall lower cost of capital of 5% compared to
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Question:
You noticed that your firm’s debt has an overall lower cost of capital of 5% compared to equity of 15%. Therefore, you suggested to the financial manager of your firms that they should increase it’s debt component in capital structure from 30% to 70% while reducing its equity component from 70% to 30% instead. To back your justifications, under this new arrangement, your firm’s cost of equity would be 20%.
i) Calculate, what would be the new cost of debt?
ii) With this new arrangement, did you managed to reduce the overall cost of capital?
Related Book For
Taxation for Decision Makers 2014
ISBN: 9781118654545
6th edition
Authors: Shirley Dennis Escoffier, Karen Fortin
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