Question
Cullen & Co. is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that consists of 10 percent debt
Cullen & Co. is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that consists of 10 percent debt and 90 percent equity. The risk-free rate (on S-T Treasury securities) is 1.2% and the market risk premium is 6%. Currently the company's cost of equity (based on the SML) is 9.72%, and its tax rate is 25%.
What is the current beta for the company?
What is the unlevered beta for Cullen?
What would be the beta if the company changed its capital structure to 16% debt and 84% equity?
What would be the new estimated cost of equity if the company were to change its capital structure to 16% debt and 84% equity?
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