Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital structure that consists of 20% debt and 80% equity. The risk-free rate is 6% and the market risk premium is 5%. The company’s cost of equity is 12% under the capital asset pricing model approach and its corporate tax rate is 40%. What would be Blue’s estimated cost of equity if it were to shift its capital structure to one wherein half of its resources is funded by debt? a. 14.35% b. 20.00% c. 15.32% d. 12.30%

Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital structure that consists of 20% debt and 80% equity. The risk-free rate is 6% and the market risk premium is 5%. The company’s cost of equity is 12% under the capital asset pricing model approach and its corporate tax rate is 40%. What would be Blue’s estimated cost of equity if it were to shift its capital structure to one wherein half of its resources is funded by debt? a. 14.35% b. 20.00% c. 15.32% d. 12.30%

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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