question archive Northern Illinois UniversityFIN 330 Stephens electronic is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity

Northern Illinois UniversityFIN 330 Stephens electronic is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity

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Northern Illinois UniversityFIN 330

Stephens electronic is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRF, is 7.5%, the ,market risk premium, RPM, is 9.0%, and the firm's tax rate is 40%. Currently, the cost of equity, rs, is 17.25% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?

 

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