Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is...

Dyson Inc. currently finances with 20.0% debt (i.e., w_d = 20%), but its new CFO is considering changing the capital structure so w_d = 74.5% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (w_c) = 1 – w_d. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Do not round your intermediate calculations. (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)

Risk-free rate, r_RF	5.00%	Tax rate, T	40%
Market risk prem, RP_M	6.00%	Current w_d	20%
Current beta, b_L1	1.30	Target w_d	74.5%

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jeff jeffy answered 2 years ago

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Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is...

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