Question

Blossom Chiropractic Clinic produces $220,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to repurchase $600,000 of its equity by borrowing $600,000 at a rate of 11 percent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Blossom after it changes its capital structure. Assume that Modigliani and Miller Proposition 1 assumptions hold. (Round answer to 2 decimal places, e.g. 17.54%.)

Cost of equity capital _____________%

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -