Reference no: EM133002231

Starbuck's current capital structure (based on market value of the bond and stock outstanding) is 70% debt and 30% equity. The common stock is reported to have a beta of 1.15 if you search on Google and the company's tax rate is 30%. Starbuck is looking to open 100 new stores in Canada and it is looking to finance this expansion through issuance of new shares. After the completion of this expansion, the target capital structure of Starbuck would be 50% debt and 50% equity. The current risk-free rate is 1.5% and the return of the market is 5.5%. By how much would the firm's cost of equity change after it issues shares to finance this expansion? (i.e., what's the cost of equity when the firm is at 70% debt, what's the cost of equity will be when the firm is at 50% debt, and so what is the difference)

You must show all calculation steps, providing a final answer only will not get you full marks.