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A firms capital structure initially consists solely of equity. The cost of equity is 15%, the risk-free rate is 6% and the market risk premium
A firms capital structure initially consists solely of equity. The cost of equity is 15%, the risk-free rate is 6% and the market risk premium is 10%. The firm then decides to change its capital structure to include debt and reduces equity by 40%. The debt is risky and has a beta of 0.3. The beta of equity in the old capital structure was ______ and the beta of equity in the new capital structure is ______. Assume a case with no corporate taxes.
A. 0.9, 1.3 | |
B. 2.25, 3.55 | |
C. 2.25, 5.175 | |
D. 0.9, 1.8 |
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