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Morales Publishing's tax rate is 30%, its beta is 1.20, and it uses no debt. However,...

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Finance

Morales Publishing's tax rate is 30%, its beta is 1.20, and ituses no debt. However, the CFO is considering moving to a capitalstructure with 30% debt and 70% equity. If the risk-free rate is5.0% and the market risk premium is 6.0%, by how much would thecapital structure shift change the firm's cost of equity? 1.53%1.70% 2.16% 2.05% 1.87%

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Solution Calculation of Cost of equity when the capital structure has only equity ie no debt As per the information given in the question we have Existing Beta Unlevered Beta U 120 Since it uses no debt Risk free rate 50 Market Risk Premium 60 The Cost of equity of a firm 120 is calculated using the following formula Cost of equity RF RM RF Where RF Risk    See Answer
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Transcribed Image Text

Morales Publishing's tax rate is 30%, its beta is 1.20, and ituses no debt. However, the CFO is considering moving to a capitalstructure with 30% debt and 70% equity. If the risk-free rate is5.0% and the market risk premium is 6.0%, by how much would thecapital structure shift change the firm's cost of equity? 1.53%1.70% 2.16% 2.05% 1.87%

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