Question
Monroe Inc. currently finances with 20.0% debt (i.e., w d = 20%), but its new CFO is considering changing the capital structure so w d
Monroe Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is considering changing the capital structure so wd = 62.5% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? (You must unlever the current beta and then use the unlevered beta to solve the problem)
| Risk-free rate, rRF | 5.00% | Tax rate, T | 25% | |
| Market risk prem, RPM | 6.00% | Current wd | 20% | |
| Current beta, bL1 | 1.60 | Target wd | 62.5% |
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
14th edition
007745443X, 978-0073530727, 73530727, 978-0077454432
