Question

Circle Inc. currently uses no debt, but its new CFO is considering changing the capital structure to 77.5% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (wc = 1 – wd). Given the data shown below, the cost of equity under the new capital structure minus the cost of equity under the old capital structure is _____%. If your answer is 1.23% then input 1.23 in the answer box. Risk-free rate, rf 5.00% Tax rate, t 25% Market risk premium 3.50% Current wd 0% Current beta, bu 1.65 Target wd 77.5%

Answer 1