Wentworth Industries is 100 percent equity financed. Its current beta is 1.0. The expected market rate of return is 13 percent and the risk-free rate is 9 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity.   % If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 1.2. The after-tax cost of debt will be 7 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of   %, the capital structure (should be/should not be)  changed

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
icon
Related questions
Question

Wentworth Industries is 100 percent equity financed. Its current beta is 1.0. The expected market rate of return is 13 percent and the risk-free rate is 9 percent. Round your answers to two decimal places.

  1. Calculate Wentworth’s cost of equity.

      %

  2. If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 1.2. The after-tax cost of debt will be 7 percent. Should Wentworth make the capital structure change?

    Based on the weighted cost of capital of   %, the capital structure (should be/should not be)  changed.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Levered Firm
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
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education