Your stock currently sells for $23 per share. The risk-free return is 2%, the market return...

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Your stock currently sells for $23 per share. The risk-free return is 2%, the market return is 8% and the beta for your stock is 1.32. Your capital structure is currently 50% debt and 50% equity but you feel the optimal ratio is 30% debt and 70% equity. Tax rate is 35%. a) Find beta at the new capital structure. b) Calculate and compare the cost of equity for the existing capital structure with the cost of equity for the new capital structure. Briefly explain why you would expect the cost of equity to change as it did. c) If your cost of debt is 7.3% before tax, what is the weighted average cost of capital at the new debt-to-equity ratio? Your stock currently sells for $23 per share. The risk-free return is 2%, the market return is 8% and the beta for your stock is 1.32. Your capital structure is currently 50% debt and 50% equity but you feel the optimal ratio is 30% debt and 70% equity. Tax rate is 35%. a) Find beta at the new capital structure. b) Calculate and compare the cost of equity for the existing capital structure with the cost of equity for the new capital structure. Briefly explain why you would expect the cost of equity to change as it did. c) If your cost of debt is 7.3% before tax, what is the weighted average cost of capital at the new debt-to-equity ratio?

Answer rating: 100% (QA)

Capital Structure and Cost of Equity a Beta at the New Capital Structure Weighted Average Beta Since the company is considering a change in its capita... View the full answer