Estimate its optimal capital structure

Assignment Help Financial Management

Reference no: EM131060028

Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a capital structure that consists of 50 percent debt and 50 percent equity, based on market values. (Its D/S ratio is 1.00) The risk- free rate is 6 percent and the market risk premium, KM – KRF, is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Mass Inc.’s estimated cost of equity if it were to change its capital structure to 60 percent debt and 40 percent equity?

Reference no: EM131060028

Questions Cloud

Firms required rates of return for both of equity components : Calculate a firm's required rates of return for both of its equity components: Its common stock sells for $50.00 per share and will pay a $6.00 dividend which is expected to grow at a constant 5% rate. Its preferred stock sells for $22.50 per share a..

Explain contributing factors : Define indicators, find statistics and explain contributing factors (causes) and implications (effects) for children for your country. Hint: you may wish to break down the children's ages by certain age groups.

What is the position of the cart : An air-track cart is attached to a spring and completes one oscillation every 5.67 s in simple harmonic motion. At time t = 0.00 s the cart is released at the position x = +0.250 m. What is the position of the cart when t = 29.6 s?

Evaluating an investment for firm with multiple divisions : When evaluating an investment for a firm with multiple divisions that each have different risk,

Estimate its optimal capital structure : Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a capital structure that consists of 50 percent debt and 50 percent equity, based on market values. (Its D/S ratio is 1.00) The risk- free rate is 6 percent and t..

What is the NPV of the book with the royalty payments : Bill Clinton was reportedly paid $10 million to write his book "My Life". The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Assume that, once the book was finished, it was expected to gen..

What is the angular momentum of the car : A 2000-kg car is traveling at 20 m/s around a curve with a radius of 100 m. What is the angular momentum of the car? (in kg"m2/s)

Find the thevenin equivalent circuit at given terminals : Find the Thevenin equivalent circuit at terminals (a,b). Also find the Norton equivalent circuit at terminals (a,b). Choose RL so that the current flowing through it is 0.8 A.

Calculate equity multiplier : Financial statement analysis. Suppose a firm's earnings growth rate is 5%, return on assets (ROA) is 22%, debt ratio is 45% and stock price is $50. Calculate equity multiplier.

User Account

All Pages