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What is the effect on the cost of equity in using debt

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Question - J Motors has 50 Million in assets and are all currently financed by equity. Current beta is .85, and tax rate is 30%. Your CFO suggested to opt financing the assets requirement with 30% debt. As the business owner, determine the value of the said financial decision using the HAMADA equation. Use the following questions as your guide in finding the value of your CFO's suggestion.

1. What is the beta if debt is used as a source of financing. Show computation.

2. What is the cost of equity before and after the use of debt? Show solutions.

3. What is the effect on the cost of equity in using debt?

4. What is the WACC before and after the use of debt? Show solutions.

5. Will you approve the suggestion of your CFO? Defend your answer.

Reference no: EM133022419

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