Establish its optimal capital structure

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Reference no: EM131616231

HMC Inc. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity: however, the CEO believes the firm should use more debt. The risk-free rate, r_RE, is 3.5%, the market risk premium, RP_M, is 5.5%, and the firm's tax rate is 35%. Currently, the firm's cost of equity is 8.5%, which is determined by the CAPM. What would be the firm's estimated cost of equity if it changed its capital structure to 45% debt and 55% equity?

Reference no: EM131616231

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