Question 1 1 pts Event Horizon Inc

Finance Aug 08, 2020

Question 1 1 pts Event Horizon Inc. is all-equity financed firm. The cost of capital of the firm is 10.5%. The CEO of the firm considers changing firm's capital structure to 20% debt and 80% equity. The debt will be issued at par. Projected firm's cost of equity after the change is 11.4%. Firm pays corporate tax rate of 30%. Assuming no financial distress costs, what is the interest rate on the debt? 4.42% 9.20% 3.05% 5.36% Cannot answer the question without knowing firm's credit rating

Expert Solution

We see that the interest rate on the debt=10.5%-(11.4%-10.5%)/(20%/80%*(1-30%))
=5.36%

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