Exam Preparation $4$: Another Un$-$Levering and Re$-$Levering Beta

Calculate the effect of increasing the level of debt in the firm's capital structure by un$-$levering and re$-$levering Beta.

Information for the firm:

Rm $=0\mathrm{.}14$ Current debt $=26,250$

Rrf $=0\mathrm{.}06$ Current equity $=75,000$

MRP $($Rm $$ Rrf$)=0\mathrm{.}08$ New debt level $=45,000$

T $=0\mathrm{.}25$ Current D$/$E $=0\mathrm{.}35$

Current $\backslash$beta $1\mathrm{.}150$ Proposed D$/$E $=0\mathrm{.}60$

Step $1$: Un$-$lever Beta.

Step $2$: Re$-$lever beta at the new proposed level of debt.

Step $3$: Recalculate the cost of equity using CAPM.