Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering ch
ID: 2671519 • Letter: D
Question
Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering changing the capital structure to 60.0% debt by issuing additional bonds and using the proceeds to repurchase and retire some common stock at book value. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)Risk-free rate, rRF 5.00% Tax rate, T 40%
Market risk premium, RPM 6.00% Current debt ratio 20%
Current beta, bL1 .15 Target debt ratio 60%
Explanation / Answer
Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering changing the capital structure to 60.0% debt by issuing additional bonds and using the proceeds to repurchase and retire some common stock at book value. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Risk-free rate, rRF 5.00% Tax rate, T 40% Market risk premium, RPM 6.00% Current debt ratio 20% Current beta, bL1 .15 Target debt ratio 60% answer :7.50%
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