Microsoft is trying to estimate its optimal capital structure. Right now, it has a capital structure that
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Question:
Microsoft is trying to estimate its optimal capital structure. Right now, it has a capital structure that consists of 20% debt and 80% equity. Its D/E is 25%. The risk free rate is 6% and the market risk premium is 5%. Currently, the company's cost of equity, which is based on CAPM is 12% and its tax rate is 40%. What would be Microsoft's estimated cost of equity of it were to change its capital structure to 50% debt and 50% equity?
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