Archimedes Levers is financed by a mixture of debt and equity. You have the foll

Question

Archimedes Levers is financed by a mixture of debt and equity. You have the following information about its cost of capital:

Suppose now that Archimedes repurchases debt and issues equity so that D/V = 0.35. The reduced borrowing causes rD to fall to 12%. Calculate the rE, rA, ?E, ?D, and ?A. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Archimedes Levers is financed by a mixture of debt and equity. You have the following information about its cost of capital:

Explanation / Answer

Re=Riskfree Rate+Beta*(Market Rate-Riskfree Rate)=11+1.6*(16-11)=19%

Rd=13%

D/V=0.55 implies E/V=0.45

Ra=0.55*13+0.45*19=15.7%

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