In: Finance
Laramie Trucking's CEO is considering a change to the company's
capital structure, which currently consists of...
Laramie Trucking's CEO is considering a change to the company's
capital structure, which currently consists of 25% debt and 75%
equity. The CFO believes the firm should use more debt, but the CEO
is reluctant to increase the debt ratio. The risk-free rate,
rRF, is 5.0%, the market risk premium, RPM,
is 6.0%, and the firm's tax rate is 25%. Currently, the cost of
equity, rs, is 11.5% as determined by the CAPM. What
would be the estimated cost of equity if the firm used 60% debt?
(Hint: You must first find the current beta and then the unlevered
beta to solve the problem.)