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A company is estimating its optimal capital structure

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A company is estimating its optimal capital structure. Now the company has a capital structure that consists of 50% debt and 50% equity, based on market values (debt to equity D/S ratio is 1.0). The risk-free rate (r_RF) is 3.5% and the market risk premium (r_M - r_RF) is 5%. Currently the company's cost of equity, which is based on the CAPM, is 13.5% and its tax rate is 30%. Find the firm's current leveraged beta using the CAPM

2.0

1.5

2.6

1.9

 

Question 41

Based on the information from Question 40, find the firm's unleveraged beta using the Hamada Equation

1.95

1.0

1.18

1.29

 

Question 42

Based on the information from Question 40 and 41, what would be the company's new leveraged beta if it were to change its capital structure to 60% debt and 40% equity (D/S=1.5) using the Hamada Equation?

1.65

1.95

2.16

2.41

 

Question 43

Based on the information from Question 40 ~ 42, what would be the company's new cost of equity if it were to change its capital structure to 60% debt and 40% equity (D/S =1.5) using the CAPM?

13.8%

15.6%

16.8%

18.5%