Question

Company X’s current capital structure consists of 60% debt and 40% common equity. Its current beta is 1.74. The risk-free interest rate is 3%, market risk premium is 5%, and the company’s tax rate is 30%. Using the CAPM, what is the company’s required rate of return if its capital structure changes to 50% debt and 50% common equity? (A) 7.24% (B) 10.21% (C) 11.70% (D) 13.01% (E) 17.79%

Answer #1

40. 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 (rRF) is 3.5% and the market
risk premium (rM – rRF) 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...

40. 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 (rRF) is 3.5% and the market
risk premium (rM – rRF) 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....

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Group of answer choices...

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 (rRF) is 3.5% and the market risk
premium (rM – rRF) 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...

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