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28 Sep 2019
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM â rRF, is 5%. Currently the companyâs cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Simonâs estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM â rRF, is 5%. Currently the companyâs cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Simonâs estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
Beverley SmithLv2
28 Sep 2019