Other solar technology companies average about 60 percent debt-equity ratio (Table-1), and Allen wonders what the effects on stock price and the firm value are.

PART I

Sun Solar has earnings before interest and taxes of $106 million and considering making a change to its capital structure to reduce its cost of capital and increase firm value.

Right now, Sun is all equity with unlevered cost of capital of 10 % based on CAPM. The risk-free rate is 3%, the market risk premium (MRP=R_M - R_RF) of 6% and tax rate of 25%.

1. What would be Suns estimated levered cost of equity and cost of capital if it were to change its capital structure to the industry average in Table 1?

Table 1- Solar Industry Peers		Market Cap	Net Income	P/S	P/B	P/E	Interest	D/E
	stock price	Mil	Mil				Coverage
SolarEdge Technologies Inc	37.95	1,632	77	3.3	4.4	21.6
First Solar Inc (USD)	67.96	7,137	-425	2.4	1.3		-22	0.1
SunPower Corp (USD)	8.51	1,211	-557	0.5	1.7		-8.3	2.5
JinkoSolar Holding Co Ltd (USD,CNY)	24.47	804	1,118	0.2	0.8	19.5		0.1
Sunrun Inc (USD)	5.89	648	94	1.3	0.9	6.9		1.3
Hanwha Q CELLS Co Ltd (USD)	7.2	587	22	0.3	1.2		3.3	0.7
Vivint Solar Inc (USD)	3.95	459	45	2	0.8	10.3	-5.9	1.5
JA Solar Holdings Co Ltd (USD,CNY)	7.47	353	503	0.1	0.3	4.1	4	0.3
ReneSola Ltd (USD)	2.7	52	-100	0.1	3.8		0	2.2
Greatcell Solar Ltd (USD,AUD)	2.76	52	-7	51	59.6		-185.1	0.1
Vivopower International PLC (USD)		39	0	0.7	0.7	12.1	19.8	0.3
Sunworks Inc (USD)	1.07	24	-7	0.3	1.3		-8.1	0.1
Industry Average		355	-153	0.7	1.4		-44.6	0.6