Cost of equity after capital structure change is closest

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Reference no: EM132028956

Sullivan Company, which is currently all-equity, has a cost of equity of 8%. Sullivan plans to change its capital structure such that its capital structure would consist of 30% debt and 70% equity. In order to make this change, Sullivan would issue debt and use the proceeds to purchase back an equivalent amount of equity. Sullivan’s before-tax cost of debt is 6%. Its marginal tax rate is 35%. The cash flows are assumed to be perpetual.

Based on MM propositions with corporate taxes, Sullivan’s cost of equity after the capital structure change is closest to:

a. 8.0%

b. 8.6%

c. 8.8%

Reference no: EM132028956

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