Question
Wyoming Enterprises is contemplating making a change to its capital structure with the goal of increasing its value. Wyoming's capital structure consists of common stock
Wyoming Enterprises is contemplating making a change to its capital structure with the goal of increasing its value. Wyoming's capital structure consists of common stock and debt. To estimate the cost of debt, Wyoming calculated the following data:
Wyoming uses the CAPM to estimate its cost of common equity. The risk-free rate is 5% and the market risk premium is 6%. The company estimates that if it had no debt its beta would be 0.5 (Its "unlevered beta," equals 0.5). Wyoming's tax rate is 40%.
Based on this information, what is Wyoming's optimal capital structure, and what is the company's cost of capital at this optimal capital structure?
Question 4 options:
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