Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering ch

Question

Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering changing the capital structure to 70.0% 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 prem, RPM
6.00%
Current debt ratio
20%
Current beta, bL1
1.15
Target debt ratio
70%




1. 7.50%

2. 8.93%

3. 6.45%

4. 8.85%

5. 7.35%

Please show work??

Explanation / Answer

Dyson Inc. currently finances with 20.0% debt, but its new CFO is considering changing the capital structure to 70.0% 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 70% answer :7.50%

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