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A.* X A A A .. M.CO. AaBb AeBbcc AaBbc H2 3 RA QUESTION 4 (10 POINTS) ABC is considering a large-scale recapitalization. Currently, ABC
A.* X A A A .. M.CO. AaBb AeBbcc AaBbc H2 3 RA QUESTION 4 (10 POINTS) ABC is considering a large-scale recapitalization. Currently, ABC is financed with 30 percent debt and 70 percent equity. ABC is considering increasing its level of debt until it is financed with 60 percent debt and 40 percent equity. The beta on its common stock at the current level of debt is 1.2, the risk-free rate is 5 percent, the market risk premium is 3 percent, and ABC faces a tax rate of 30 percent. a. What is ABC's current cost of equity? (2 points) b. What is ABC's unlevered beta? (3 points) c. What will be the new beta and new cost of equity if ABC recapitalizes? (5 points)
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