Question
Below is information on proposed capital structures for The Palace % Financed With Debt r d 0% --- 20 8.0% 40 9.5 60 11.0 80
Below is information on proposed capital structures for The Palace
% Financed With Debt rd
0% ---
20 8.0%
40 9.5
60 11.0
80 15.0
If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. The Palace is in the 30 percent state-plus-federal corporate tax bracket, its beta is 1.25, the risk-free rate is 5.5 percent, and the market risk premium is 7.5 percent.
a. Find the beta for the equity for each of the proposed capital structures.
b. Find the cost of equity for each of the proposed capital structures.
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