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What is the current levered beta using the capm

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Reference no: EM133207238

SBS Co. is to estimate its optimal capital structure. Right now, SBS has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. The interest rate for the debt is 6%. The risk-free rate is 6 percent, and the market return is 11 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. SBS is planning to change its capital structure to 50 percent debt and 50 percent equity. The change in the debt will increase the interest rate to 8%.

a. What is the current levered beta using the CAPM?

b. What is the unlevered beta?

c. What is the new levered beta given the new capital structure?

d. What is new cost of equity given its new beta and the CAPM?

e. Should SBS change its capital structure?

Reference no: EM133207238

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