Situational Software Co. (SSC) 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, FRF, is 5%; the market risk premium, RPM, is 7%; and the firm's tax rate is 40%. Currently, SSC's cost of equity is 14%, which is determined by the CAPM. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What would be SSC's 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. %

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
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Hamada equation
Original % debt in capital structure, wd
Original % common equity in capital structure, wc
Risk-free rate, TRF
Market risk premium, RPM
Tax rate, T
Firm's cost of equity, rs
Calculation of firm's current beta:
Firm's current beta, b
Calculation of firm's unlevered beta:
Firm's unlevered beta, bu
New % of debt in capital structure, Wd New
New % of common equity in capital structure, Wc New
Calculation of firm's new beta:
Firm's new beta, bL New
Calculation of firm's new cost of equity:
Firm's new cost of equity, rs New
30.00%
70.00%
5.00%
7.00%
40.00%
14.00%
50.00%
50.00%
Formulas
#N/A
#N/A
#N/A
#N/A
Transcribed Image Text:Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
Excel Online Structured Activity: Hamada equation
Situational Software Co. (SSC) 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, FRF, is 5%; the market risk premium, RPM, is 7%; and the firm's tax rate
is 40%. Currently, SSC's cost of equity is 14%, which is determined by the CAPM. The data has been collected in the Microsoft Excel Online file below.
Open the spreadsheet and perform the required analysis to answer the question below.
X
Open spreadsheet
What would be SSC's 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.
%
Transcribed Image Text:Excel Online Structured Activity: Hamada equation Situational Software Co. (SSC) 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, FRF, is 5%; the market risk premium, RPM, is 7%; and the firm's tax rate is 40%. Currently, SSC's cost of equity is 14%, which is determined by the CAPM. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet What would be SSC's 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. %
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