Wentworth Industries is 100 percent equity financed. Its current beta is 0.9. The expected market rate of

Question:

Wentworth Industries is 100 percent equity financed. Its current beta is 0.9. The expected market rate of return is 14 percent and the risk-free rate is 8 percent.

a. Calculate Wentworth’s cost of equity.

b. If Wentworth changes its capital structure to 30 percent debt, it estimates that its beta will increase to 1.1. The after-tax cost of debt will be 7 percent. Should Wentworth make the capital structure change?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...