Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/E ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM – rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. A. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?

Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/E ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM – rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. A. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

See similar textbooks

Related questions

Q: consists of 23% debt and 77% equity. The risk free rate is 4% and the market risk premium is 6%.…

A: Beta shows the risk related to the overall risk of the market and it shows risk and volatility…

Q: es Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent…

A: a. To compute the weighted average cost of capital (WACC), we can use the formula:WACC=wd ×rd +we…

Q: Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40%…

A: Cost of equity is the return required by the individual for equity investment or the return required…

Q: capital structure. Right now, LG has a capital structure that consists of 20 percent debt and 80…

Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…

A: Debt= 25% Equity= 75% Rf= 5% RPM= 6% Tax Rate= 40% Cost of equity=14% Cost of equity if it changed…

Q: Lucky Cement is trying to establish its optimal capital structure. Its current capital structure…

A: The question is based on the concept of optimal capital structure for firm based on the calculation…

Q: Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure…

A: Given information : Current debt = 30% Current equity = 70% Risk free rate RF = 5% Market risk…

Q: Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 8 percent…

A: Weighted average cost of capital (WACC) is defined as the calculation or computation of the cost of…

Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…

A: The cost of equity is the cost of financed the funds from the equity shareholders.

Q: The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The…

A: Cost of equity is the required rate of return shareholders expect from the company in order to…

Q: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current…

A: In this problem, we have to first unlever the beta and re-lever it to find the new cost of equity…

Q: A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a…

A: The objective of the question is to calculate the cost of equity (rS) after the firm's…

Q: Nalcoa Corp. is financing a project that is in the same industry as its current portfolio of…

A: In this question, we are required to determine the weighted average cost of capital.

Q: *The capital structure is 40% debt and 60% equity. *The before-tax cost of debt (which includes…

A: Given information :

Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…

Q: Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure…

A: Here, Risk-Free Rate is 5% Market Risk Premium is 6% Cost of Equity as per CAPM is 14% Current…

Q: 1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a…

A: The first part of the question is asking for the cost of equity (rS) after the firm has undergone…

Q: A company is estimating its optimal capital structure. Now the company has a capital structure that…

A: The Beta of security indicates the risk related to the market and show much the stock is volatile…

Q: Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital…

A: Debt/Equity = 20%/80% = 0.25 Calculation of current levered beta :- Cost of equity = Risk free…

Q: Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a…

A: The Capital Asset Pricing Model is a model that describes the relationship between the expected…

Q: Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current…

A: Data given: Debt=30% Equity=70% Risk free rate=5% Market risk premium=7% Tax rate=40% Cost of…

Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…

A: Given, Current capital structure = 25% debt and 75% equity Risk free rate = 5% Market risk premium =…

Q: What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60%…

A: Given optimal capital structure = 25% debt and 75% equity risk free rate = 4% market risk premium =…

Q: A company is trying to establish its optimal capital structure. Its current capital structure…

A: A financial model called the Capital Asset Pricing Model (CAPM) is used to calculate an investment's…

Q: Situational Softv the firm should determined by t Round your ans %

A: Current debt proportion30%Current debt proportion70%Risk-free rate5%Market risk premium5%Tax…

Question

Please show all work on excel

A. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction of cost of equity

VIEW

Step 2: Calculation of new cost of equity

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

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.

Similar questions

Sim Software Co trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 10 percent debt and 90 percent equity. The risk - free rate is 3 percent and the market risk premium is 8 percent. Currently, the company's cost of equity is 15 percent and its tax rate is 21 percent. What is the unlevered cost of equity?
A company is estimating its optimal capital structure. Now the company has a capital structure that consists of 20% debt and 80% equity, based on market values (debt to equity D/S ratio is 0.25). The risk-free rate (rRF) is 5% and the market risk premium (rM – rRF) is 6%. Currently the company’s cost of equity, which is based on the CAPM, is 14% and its tax rate is 20%. Find the firm’s current leveraged beta using the CAPM 1.0 1.5 1.6 1.7
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%
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon 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 6 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. Find the new levered beta given the new capital structure (if it were to change its capital structure to 50 percent debt and 50 percent equity) using the Hamada equation. O 1.67 O 0.81 O 1.00 O 1.22 O 1.45
Want a complete detailed answer with formulas and steps Cyclone Software Co. 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, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Cyclone’s cost of equity is 14%, which is determined by the CAPM. What would be Cyclone’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? based on cost of equity estimations, Should the firm change its capital structure?
i Johnson, Inc. is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that consists of 23% debt and 77% equity. The risk free rate is 4% and the market risk premium is 6%. Currently the company's cost of equity, which is based on the SML, is 12.5% and its tax rate is 40%. What would be the firm's estimated cost of equity if it were to change its capital structure to 30% debt and 70% equity. a. 11.21% b. 10.76% C. 18.05% d. 12.01% e. 13.06%
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.
Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Lucky’s cost of equity is 14%, which is determined by the CAPM.1. What would be Lucky’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity?2. What would be Lucky’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?3. Based on cost of equity estimations, should the firm change its capital structure? if yes, which point is optimal if the target is to minimize the cost of equity of the firm?
Cyclone Software Co. 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, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Cyclone’s cost of equity is 14%, which is determined by the CAPM. What would be Cyclone’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? based on cost of equity estimations, Should the firm change its capital structure?
A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization?
FFC 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 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently, FFC has beta of 1.5. What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure, decide based on the cost of equity computations?
1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…