Author Question: Vafeas Inc.s capital structure consists of 75% debt and 25% common equity, it has a beta of 1.5, and ... (Read 68 times)

903f23fj0 · **on:** Aug 7, 2023

Vafeas Inc.’s capital structure consists of 75% debt and 25% common equity, it has a beta of 1.5, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 45% debt and 55% equity. The risk-free rate is 6% and the market risk premium is 7%. By how much would the firm’s cost of equity change as a result of altering its capital structure?

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–3.20%

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–3.78%

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–4.36%

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4.91%

spicyzack · **Reply #1 on:** Aug 7, 2023

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