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.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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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
Transcribed Image Text: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
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