Your firm has a debt-equity ratio of 60.Your cost of equity is 11% and your cost of
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Question:
Your firm has a debt-equity ratio of 60.Your cost of equity is 11% and your cost of debt is 4%.
Elon Tusk, the CEO of Mesla, wants to increase the company's growth and is therefore considering increasing the level of debt to reach a target capital structure with a 50/50 mix of debt and equity.
What will happen to your firm's cost of equity if this decision goes through?
You are facing uncertainty about what the tax rates will be for the near future, so your boss would like you to look at this in a situation without taxes first, and then consider a situation where the tax rate is 24%. Briefly discuss the effect of taxes.
Capital Structure Analysis | |||||
Current D/E Ratio | 0.6 | No Tax Rate | 0% | ||
Current Cost of Equity | 11% | The newthe cost of equity | ?????? | ||
Current Cost of Debt | 4% | ||||
Target weight of equity | 50% | Tax Rate | 24% | ||
New Cost of Equity | ?????? | ||||
Briefly discuss Effect of Taxes: The effects of taxes on a company | |||||
increase/decreases the cost of equity to the shareholders. |
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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