Therap software company is trying to decide its optimal capital structure. The company’s current capital structure consists of 35% debt and 65% common equity; however, the treasurer believes that the firm should use more debt. Currently, the company’s cost of equity capital is 9%, which is determined by CAPM. What would be Therap’s estimated cost of equity capital if they change their capital structure to 50% debt? The risk-free rate is 3%, the market index returns 11%, and the company is in the 25% tax bracket.
Therap software company is trying to decide its optimal capital structure. The company’s current capital structure consists of 35% debt and 65% common equity; however, the treasurer believes that the firm should use more debt. Currently, the company’s cost of equity capital is 9%, which is determined by CAPM. What would be Therap’s estimated cost of equity capital if they change their capital structure to 50% debt? The risk-free rate is 3%, the market index returns 11%, and the company is in the 25% tax bracket.
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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- Therap software company is trying to decide its optimal capital structure. The company’s current capital structure consists of 35% debt and 65% common equity; however, the treasurer believes that the firm should use more debt. Currently, the company’s
cost of equity capital is 9%, which is determined byCAPM . What would be Therap’s estimated cost of equity capital if they change their capital structure to 50% debt? The risk-free rate is 3%, the market index returns 11%, and the company is in the 25% tax bracket.
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