Dye industries currently uses no debt, but its new cfo is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 − wd. given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rl − ru?

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brookstori5350 brookstori5350

17-11-2018
Business

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Dye industries currently uses no debt, but its new cfo is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 − wd. given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rl − ru?

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sherrieasbury19 sherrieasbury19 · Answer 1 · 2018-11-17T12:28:14+01:00

Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU?

Risk-free rate, rRF 6.00% Tax rate, T 40%
Market risk premium, RPM 4.00% Current wd 0%
Current beta, bU 1.15 Target wd 40%

1.84%