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  3. 35.) a company is trying to estimate its optimal

35.) A company is trying to estimate its optimal capital structure. Right now, the...

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Finance

35.)

A company is trying to estimate its optimal capital structure. Right now, the company has a capital structure that consists of 20% debt and 80% equity, based on market values (that means the debt to equity D/S ratio is 0.25). The risk-free rate (rRF) is 5% and the market risk premium (rM rRF) is 6%. Currently the companys cost of equity, which is based on the CAPM, is 14% and its tax rate is 20%. Find the firms current leveraged beta using the CAPM

1.0

1.5

1.6

1.7

36.)

Based on the information from Question 35, find the firms unleveraged beta using the Hamada Equation

0.95

1.0

1.25

1.35

37.)

Based on the information from Question 35 and 36, what would be the companys new leveraged beta if it were to change its capital structure to 50% debt and 50% equity (D/S=1.0) using the Hamada Equation?

1.25

1.35

1.95

2.25

38.)

Based on the information from Question 35 ~ 37, what would be the companys new cost of equity if it were to change its capital structure to 50% debt and 50% equity (D/S =1.0) using the CAPM?

13.8%

15.6%

16.8%

18.5%

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