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Question -
i. Your capital structure consists of 30% debt and 70% equity and you believe that to use more debt. The risk-free rate is 5%; the market risk premium is 6%; and the tax is 40%. The cost of equity is 14%. What would be the estimated cost of equity if capital structure turns to 50% debt and 50% equity?
ii. You have a capital structure consisting of 30% debt and 70% equity. There is an 8% yield to maturity. The risk-free rate is 5%, and the market risk premium is 6%. Using the CAPM, the cost of equity is currently 12.5%. There is 40% tax rate.
a. Calculate current WACC?
b. Calculate the current beta on common stock?
c. Calculate the beta ifyou had no debt in the capital structure, that is unlevered beta?
Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios;
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