Laiba Corporation (LC) is considering a large-scale recapitalization. Currently, LC is financed with 100 percent equity. The beta on its common stock at the current level is 1.25, the risk free rate is 8 percent, the market return is 14 percent, and LIC faces a 40 percent federal-plus-state tax rate. Required: What is LIC’s current cost of equity? What is LIC’s unlevered beta? If the company wants to recapitalize its capital structure, increase its debt by 30% and 70% equity. What will be the new beta and new cost of equity if LC recapitalizes? What if the company recapitalize its capital structure to 50% debt and equity, what will be new beta and new cost of equity?
Laiba Corporation (LC) is considering a large-scale recapitalization. Currently, LC is financed with 100 percent equity. The beta on its common stock at the current level is 1.25, the risk free rate is 8 percent, the market return is 14 percent, and LIC faces a 40 percent federal-plus-state tax rate. Required: What is LIC’s current cost of equity? What is LIC’s unlevered beta? If the company wants to recapitalize its capital structure, increase its debt by 30% and 70% equity. What will be the new beta and new cost of equity if LC recapitalizes? What if the company recapitalize its capital structure to 50% debt and equity, what will be new beta and new cost of equity?
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
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Laiba Corporation (LC) is considering a large-scale recapitalization. Currently, LC is financed with 100 percent equity. The beta on its common stock at the current level is 1.25, the risk free rate is 8 percent, the market return is 14 percent, and LIC faces a 40 percent federal-plus-state tax rate.
Required:
- What is LIC’s current
cost of equity ? - What is LIC’s unlevered beta?
- If the company wants to recapitalize its capital structure, increase its debt by 30% and 70% equity. What will be the new beta and new cost of equity if LC recapitalizes?
- What if the company recapitalize its capital structure to 50% debt and equity, what will be new beta and new cost of equity?
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