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Vafeas Inc.s capital structure consists of 75% debt and 25% common equity, it has a beta of 1.5, and ...

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Vafeas Inc.s capital structure consists of 75% debt and 25% common equity, it has a beta of 1.5, and ...

Vafeas Inc.’s capital structure consists of 75% debt and 25% common equity, it has a beta of 1.5, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 45% debt and 55% equity. The risk-free rate is 6% and the market risk premium is 7%. By how much would the firm’s cost of equity change as a result of altering its capital structure?

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–3.20%

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–3.78%

▸

–4.36%

▸

4.91%

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

Read 200 times

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