Respuesta :
The calculated cost of equity before and after the change in the capital structure are 11.60 percent and 13.30 percent, respectively.
Typically, the capital asset pricing model is used to determine a company's cost of equity or rate of return for shareholders. In this model, the cost of equity is governed by the risk-free rate offered by government securities like treasury bills, the market risk premium, and the stock's beta.
According to the Capital Asset Pricing Model (CAPM), the cost of equity prior to the capital structure change is as follows:
= Risk-free rate minus (beta minus market risk premium) = 5% minus (1.10 minus 6%) = 5% minus 6.60 % = 11.60 % Following the capital structure change, the debt to equity ratio is as follows:
= Debt/Equity Ratio = 30% 70% = 0.43 The levered beta following the capital structure change is as follows:
= Unlevered beta * 1 + (-1) tax rate * debt to equity ratio = 1.10 * (-1) 40% * 0.43 = 1.10 * 1.258 = 1.38 According to the Capital Asset Pricing Model (CAPM), the cost of equity is as follows:
= Sans risk rate + (turned beta * market risk premium)
= 5% + (1.38 * 6%)
= 5% + 8.30%
= 13.30%
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