Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Johnson, Inc. is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that
consists of 23% debt and 77% equity. The risk free rate is 4% and the market risk premium is 6%. Currently
the company's cost of equity, which is based on the SML, is 12.5% and its tax rate is 40%. What would be the
firm's estimated cost of equity if it were to change its capital structure to 30% debt and 70% equity.
a. 11.21%
b. 10.76%
C. 18.05%
d. 12.01%
e. 13.06%
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Transcribed Image Text:i Johnson, Inc. is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that consists of 23% debt and 77% equity. The risk free rate is 4% and the market risk premium is 6%. Currently the company's cost of equity, which is based on the SML, is 12.5% and its tax rate is 40%. What would be the firm's estimated cost of equity if it were to change its capital structure to 30% debt and 70% equity. a. 11.21% b. 10.76% C. 18.05% d. 12.01% e. 13.06%
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