Establish its optimal capital structure

Assignment Help Financial Management

Reference no: EM131074599

Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 40% debt and 60% equity; however, the CEO believes the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 5%; and the firm's tax rate is 40%. Currently, Cyclone's cost of equity is 13%, which is determined by the CAPM. What would be Cyclone's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places.

Reference no: EM131074599

Questions Cloud

Yield positive riskless arbitrage profits : A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Credit rating improvement or market interest rate changes : Holding Period Return Collapse You buy a 7% annual coupon bond for $875 today. The bond has 10 years till maturity. What rate of return do you 'expect' to earn on your bond investment? Two years from now, the YTM on your bond has declined by 1% due t..

Financial leverage effects : Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital, has $5.4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Calculate the return on inve..

What is the required return on the firms levered equity : Mojito Mint Company has a debt–equity ratio of .20. The required return on the company’s unlevered equity is 13 percent, and the pretax cost of the firm’s debt is 8.7 percent. Sales revenue for the company is expected to remain stable indefinitely at..

Establish its optimal capital structure : Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 40% debt and 60% equity; however, the CEO believes the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk pre..

About the unlevered beta : Harley Motors has $17 million in assets, which were financed with $3.4 million of debt and $13.6 million in equity. Harley's beta is currently 1.85 and its tax rate is 35%. Use the Hamada equation to find Harley's unlevered beta, bU.

What is the cost of trade credit from this vendor : A vendor offers payment terms of 3/20, net 60. What does this mean for the timing and costs of paying this vendors bills? Using a 360 day year, what is the cost of trade credit from this vendor?

Follows the economic order quantity model : ABC Company sells 2,675 chairs a year at an average price per chair of $127. The carrying cost per unit is $52.12. The company orders 477 chairs at a time and has a fixed order cost of $159 per order. The chairs are sold out before they are restocked..

Reviewed the operations of the business carefully : You have recently acquired a franchise for Dunkin’ Donuts. You have reviewed the operations of the business carefully, from marketing to management, from accounting to finance. You have noticed that the store manager does not have a proper inventory ..

User Account

All Pages