Question
18. Kyle Industries currently uses no debt, but its new CFO is considering changing the capital structure to 20.0% debt (wd) by issuing bonds and
18. Kyle Industries currently uses no debt, but its new CFO is considering changing the capital structure to 20.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL rU? Risk-free rate, rRF 4.00% Tax rate, T 30% Market risk premium, RPM 6.00% Current wd 0% Current beta, bU 1.15 Target wd 20% a. 1.41% b. 1.21% c. 2.07% d. 3.07% e. 4.07%
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