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Should LIGAYA management proceed with the capital structure

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Question - LIGAYA, which has no current debt, has a beta of 0.95 for its ordinary shares. Management is considering a change in the capital structure to 30 percent debt and 70 percent equity. This change would increase the beta on the stock to 1.15, and the after-tax cost of debt will be 7.5 percent. The expected return on equity is 15 percent, and the risk free rate is 6 percent. Tax rate is 30%. Should LIGAYA's management proceed with the capital structure change? Why?

Reference no: EM132772072

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