Question
Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 55.5% debt (wd) by issuing bonds and using
Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 55.5% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure wc = 1 wd declines. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU? Do not round your intermediate calculations. Risk-free rate, rRF 5.00% Tax rate, T 25% Market risk prem., RPM 3.00% Current wd 0% Current beta, bU 1.20 Target wd 55.50%
a. 3.37 p.p.
b. 1.12 p.p.
c. 5.61 p.p.
d. 4.49 p.p.
e. 2.16 p.p.
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