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You can put any number what you want on the 'xx' (25 points) ABC company and XYZ company have identical assets and currently they both
You can put any number what you want on the 'xx'
(25 points) ABC company and XYZ company have identical assets and currently they both have a debt- equity ratio of 1. Both companies have a cost of riskless debt of 4% and return on equity of 20%. Expected rate of return on market portfolio is 14% and firms are not subject to any taxes in this economy. a) ABC company decides to change its debt-equity ratio to 0.5 by issuing equity and retiring debt. What is its cost of equity after capital restructuring? b) XYZ company decides to change its debt-equity ratio to 2 by issuing debt and retiring equity. At this point, debt becomes risky and has a beta of 0.xx, where xx is the last two digits of your student number. What is its cost of equity after capital restructuring? (Hint: You can use CAPM to estimate cost of risky debt) (25 points) ABC company and XYZ company have identical assets and currently they both have a debt- equity ratio of 1. Both companies have a cost of riskless debt of 4% and return on equity of 20%. Expected rate of return on market portfolio is 14% and firms are not subject to any taxes in this economy. a) ABC company decides to change its debt-equity ratio to 0.5 by issuing equity and retiring debt. What is its cost of equity after capital restructuring? b) XYZ company decides to change its debt-equity ratio to 2 by issuing debt and retiring equity. At this point, debt becomes risky and has a beta of 0.xx, where xx is the last two digits of your student number. What is its cost of equity after capital restructuring? (Hint: You can use CAPM to estimate cost of risky debt)Step by Step Solution
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