What should be the risk free rate

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A firm has the following capital structure: £240 million of equity (market value), trading at £2.4 per share, and £160 million of debt. The beta of the firm’s stock is 1.5. The firm’s cost of equity is 10 percent, and the expected return on the market portfolio is 7 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions. i) How many shares of the firm are outstanding? ii) What should be the risk free rate? What is the WACC of the firm? iii) What is the WACC of the firm? iv) Suppose the firm changes its capital structure so that its debt increases to £200 million, and the equity decreases by £40 million. What should be the firm’s cost of equity after the change?

Reference no: EM131944463

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