Question

Themes Page Setup Scale to Fit Sheet Options 3 A с E G Bumpkins currently finances with 30.0% debt (i.e., Wa=30%), but its new CFO is considering changing the capital structure to wg = 60.0% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure = 1 - Wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Risk Free Rate Mkt Risk premium Current Beta 5% 5% 1.05 Tax rate Current Debt weight Target debt weight 40% 30% 60% Current cost of eq Unlevered Beta New Beta + 3 New cost of equity Change in cost Problem 2 Problem 3 Problem 4 Problem 5 Problem 6 Problem 7 Problem 8 9 10 Problem 11 Pro eady O Type here to search iT

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

unlevered beta = levered beta / ( 1 + (D/S)(1-t))

levered beta = unlevered beta * ( 1 + (D/S)(1-t))

06:48 DE C w ENG 99+ 31-07-2020 28 Х F23 A B с D E F G H J K - 2 3 4 5 6 7 8 9 5% 5% tax rate current debt weight target debt weight 40% 30% 60% 1.05 10.25% (=B11+B13*B12] 0.8352 (=B13/(1+(F12/(1-F12))*(1-F11))] 10 11 Risk free rate 12 Market risk premium 13 current beta 14 15 current cost of equity 16 unlevered beta 17 18 19 new beta [levered beta] 20 21 ne cost of equity 22 change in cost 23 24 25 1.5869 (=B16*(1+(F13/(1-F13))*(1-F11))] 12.93% (=B11+B19*B12] 2.68% (=B21-B15]