Question
Parkville Corp has just completed a recapitalization which raised its debt/equity ratio to 3, its equity beta to 2.2, and its debt beta to 0.5.
Parkville Corp has just completed a recapitalization which raised its debt/equity ratio to 3, its equity beta to 2.2, and its debt beta to 0.5. Before the recapitalization, the firms debt/equity ratio was 0.5 and its debt was risk-free. The risk-free rate is 3% and the expected return on the market is 8%. Assume perfect capital markets. a) What is Parkvilles unlevered beta? b) What was the beta of Parkville stock before the recapitalization? c) What is Parkvilles cost of equity before and after the recapitalization? d) Did Parkvilles cost of equity change after the recapitalization? Briefly explain why or why not.
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