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All I Got, Inc. (NYSE AIG) is considering changing its capital structure. AIG currently has no debt and no preferred stock, but it would like
All I Got, Inc. (NYSE AIG) is considering changing its capital structure. AIG currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- Market Equity- Before-Tax Cost to-Value Ratio to-Value Ratio of Debt (ra) (wa) (w) 0.0 1.0 6.0% 0.2 0.8 7.0% 0.4 0.6 8.0% 0.6 0.4 9.0% 0.8 0.2 10.0% AIG uses the CAPM to estimate its cost of common equity.rs, and at the time of the analysis the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 40%. AIG estimates that its beta now (which is unlevered" because it currently has no debt) is 0.8. Question 11 (2.5 points) What is the cost of common cquity for the capital structure of 40% debt and 60% equity? 13.80% 13.40% 12.82% 12.28% 1972
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