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Conglom-O, Inc. operates in the micronation of Absurdistan, where there are no taxes and capital markets are perfect. The firm is currently financed entirely by
Conglom-O, Inc. operates in the micronation of Absurdistan, where there are no taxes and capital markets are perfect. The firm is currently financed entirely by common stock and has a beta of 1.2. The risk-free rate is 2%, and the expected return on the market portfolio is 9.2%. The firm is considering changing its capital structure by issuing debt to repurchase 30% of outstanding shares. It is expected that the new bondholders will require a 5.5% return. a. What is the current cost of equity? b. What will the cost of equity be after the change in capital structure?
Conglom-O, Inc. operates in the micronation of Absurdistan, where there are no taxes and capital markets are perfect. The firm is currently financed entirely by common stock and has a beta of 1.2. The risk-free rate is 2%, and the expected return on the market portfolio is 9.2%. The firm is considering changing its capital structure by issuing debt to repurchase 30% of outstanding shares. It is expected that the new bondholders will require a 5.5% return. a. What is the current cost of equity? b. What will the cost of equity be after the change in capital structure? |
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