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Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and...

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Finance

Serendipity Inc. is re-evaluating its debt level. Its currentcapital structure consists of 80% debt and 20% common equity, itsbeta is 1.60, and its tax rate is 25%. However, the CFO thinks thecompany has too much debt, and he is considering moving to acapital structure with 40% debt and 60% equity. The risk-free rateis 5.0% and the market risk premium is 6.0%. By how much would thecapital structure shift change the firm's cost of equity?

a. ?6.00%
b. ?5.40%
c. ?6.60%
d. ?7.26%
e. ?7.99%

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Serendipity Inc. is re-evaluating its debt level. Its currentcapital structure consists of 80% debt and 20% common equity, itsbeta is 1.60, and its tax rate is 25%. However, the CFO thinks thecompany has too much debt, and he is considering moving to acapital structure with 40% debt and 60% equity. The risk-free rateis 5.0% and the market risk premium is 6.0%. By how much would thecapital structure shift change the firm's cost of equity?a. ?6.00%b. ?5.40%c. ?6.60%d. ?7.26%e. ?7.99%

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