Question
Black Hills Company is trying to estimate its optimal capital structure. Right now, Black Hills Co. has a capital structure that consists of 20% debt
Black Hills Company is trying to estimate its optimal capital structure. Right now, Black Hills Co. has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM rRF, is 5%. Currently, the companys cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. If Black Hills Company was to change its capital structure to 40% debt and 60% equity.
Find the firms new cost of equity given its new beta and the CAPM (percentage to 2 decimal places. e.g. 12.40%).
Choose the correct answer from the list (13.30%; 16.87%; 34.12%; 101.32%; 10.12%)
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