Your firm has a debt-equity ratio of 60.Your cost of equity is 11% and your cost of debt is 4%.

Elon Tusk, the CEO of Mesla, wants to increase the company's growth and is therefore considering increasing the level of debt to reach a target capital structure with a 50/50 mix of debt and equity.

What will happen to your firm's cost of equity if this decision goes through?

You are facing uncertainty about what the tax rates will be for the near future, so your boss would like you to look at this in a situation without taxes first, and then consider a situation where the tax rate is 24%. Briefly discuss the effect of taxes.

 

Capital Structure Analysis
Current D/E Ratio	0.6			No Tax Rate	0%
Current Cost of Equity	11%			The newthe  cost of equity	??????
Current Cost of Debt	4%
Target weight of equity	50%			Tax Rate	24%
				New Cost of Equity	??????
				Briefly discuss Effect of Taxes: The effects of taxes on a company
				increase/decreases the cost of equity to the shareholders.