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Company A has recently changed its capital structure substantially by raising new equity and retiring debt. Prior to restructuring, Company A had a debt-equity ratio
Company A has recently changed its capital structure substantially by raising new equity and retiring debt. Prior to restructuring, Company A had a debt-equity ratio of 0.6 (in market value terms). Its cost of debt was 6% and cost of equity capital was 12%. After the change, its debt-equity ratio decreased to 0.2 (in market value terms) but the cost of debt remained the same.
Assume the follow:
- Tax rate: 30%
- Risk-free rate: 4%
- Market risk premium: 5%
Compute the new cost of equity, new equity beta and the new WACC.
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