capital structure. Right now, LG has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 4 percent and the market risk premium, rM – rRF, is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be LG’s unlevered beta and estimated cost of equity if it were to change its capital structure to 40 percent debt and 60 percent equity? [Use Hamada equation] Group of answer choices 1.60, and 10.84% 1.39, and 13.74% 1.39, and 15.24% 1.60, and 14.34% 1.95 and
capital structure. Right now, LG has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 4 percent and the market risk premium, rM – rRF, is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be LG’s unlevered beta and estimated cost of equity if it were to change its capital structure to 40 percent debt and 60 percent equity? [Use Hamada equation] Group of answer choices 1.60, and 10.84% 1.39, and 13.74% 1.39, and 15.24% 1.60, and 14.34% 1.95 and
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
LG Co. is trying to estimate its optimal capital structure. Right now, LG has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 4 percent and the market risk premium, rM – rRF, is 5 percent. Currently the company’s cost of equity , which is based on the CAPM , is 12 percent and its tax rate is 40 percent. What would be LG’s unlevered beta and estimated cost of equity if it were to change its capital structure to 40 percent debt and 60 percent equity? [Use Hamada equation]
Group of answer choices
1.60, and 10.84%
1.39, and 13.74%
1.39, and 15.24%
1.60, and 14.34%
1.95 and 18.72%
1.15, and 11.28%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education