Question

Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 7% yield to maturity. The risk-free rate (r_RF) is 5%, and the market risk premium (r_M – r_RF) is 6%. Using the CAPM, MME estimates that its cost of equity is currently 11.3%. The company has a 40% tax rate.

d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations. 10.70 % Hide Feedback Incorrect Check My Work Feedback Realize that you will use the CAPM equation to solve for the cost of equity. Before you can solve for the cost of equity, you need to calculate the levered beta at the new capital structure. Refer back to the Hamada equation to determine data needed to solve it. Make sure that you use the new capital structure weights in the equation to solve for b. Be careful about the mathematical order of operations in last part of equation. Solve parentheses first, then multiply, and then add. Then you can do the last multiplication to solve for b. Now you have b for the CAPM equation to solve for the cost of equity under the new capital structure. e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations. X%

Answer 1

=(11.3%-5%)/6%*1/(1+(1-40%)*35%/65%)*(1+(1-40%)*new debt to equity ratio after change in capital structure)*6%+5%