ABC Company is re-evaluating its debt level. Its current capital structure consists of 77% debt...
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ABC Company is re-evaluating its debt level. Its current capital structure consists of 77% debt and the remaining as common equity, its beta is 1.78, and its tax rate is 35%. However, as its CFO, you think the company has too much debt, and are considering moving to a capital structure with 31% debt and the remaining as common equity. The risk-free rate is 5.0% and the market risk premium is 6.9%. By how much would the capital structure shift change the company's cost of equity, that is, (current cost of equity - new cost of equity)? Round your final answer to two decimal places of percentage (Hint: Compute the new beta using the Hamada equation first and then the new cost of equity using the CAPM.)
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