A company is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, the company’s cost of equity is 14%, which is determined by the CAPM. What would be the companies estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
A financial model called the Capital Asset Pricing Model (CAPM) is used to calculate an investment's expected return based on its risk in relation to the market as a whole. The risk-free rate, the investment's beta, or volatility measure, and the market's expected return are taken into account when calculating the expected return. Investors can determine if an investment gives a suitable return for its degree of risk by using the CAPM.
Given Information :
Current Capital structure
Debt - 25%
Equity - 75%
Risk-free rate (rRF) - 6%
Market risk premium (RPM) - 6%
Firm tax rate - 40%
Current cost of Equity as per CAPM - 14%
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