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XYZ Corp. has a debt-to-equity ratio of 0.6, its equity cost of capital is 12%, and it has risk-free debt with an interest rate of 6%. In perfect capital markets, what will be XYZ's cost of equity capital if it changes its debt-to-equity ratio to 0.8? D/E re rD D/(D+E) E/(D+E) ra 0.6 12% 6% New D/E 0.8 New TE

XYZ Corp. has a debt-to-equity ratio of 0.6, its equity cost of capital is 12%, and it has risk-free debt with an interest rate of 6%. In perfect capital markets, what will be XYZ's cost of equity capital if it changes its debt-to-equity ratio to 0.8? D/E re rD D/(D+E) E/(D+E) ra 0.6 12% 6% New D/E 0.8 New TE

Essentials Of Investments
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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XYZ Corp. has a debt-to-equity ratio of 0.6, its equity cost of capital is 12%, and it has risk-free debt with an interest rate of 6%. In perfect capital markets, what will be XYZ's cost of equity capital if it changes its debt-to-equity ratio to 0.8? D/E re rD D/(D+E) E/(D+E) ra 0.6 12% 6% New D/E 0.8 New TE
Transcribed Image Text:XYZ Corp. has a debt-to-equity ratio of 0.6, its equity cost of capital is 12%, and it has risk-free debt with an interest rate of 6%. In perfect capital markets, what will be XYZ's cost of equity capital if it changes its debt-to-equity ratio to 0.8? D/E re rD D/(D+E) E/(D+E) ra 0.6 12% 6% New D/E 0.8 New TE
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