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A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will

A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will pay expected dividends of $2 million every year perpetually, and debt of maturity 10 years that will pay expected coupons of $3 million annually (6% of facevalue of $50 million). The equity is discounted at a rate of 9.30% annually, and the debt is discounted a rate of 6% annually.

In the second capital structure the firm will issue equity which will pay expected dividends of $4 million every year perpetually, and debt of maturity 10 years that will pay coupons of $1 million annually (8% of facevalue of $ 12.5 million). The debt is discounted a rate of 8% annually. What is the rate of discount for equity in CS2?

Assume that Modigliani-Miller and its assumptions are true.

Give your answer as a decimal. That is, suppose your answer is 3.7%, then enter 0.037 as your answer.

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