Dyson Inc. currently finances with 20.0% debt (i.e., w d = 20%), but its new CFO
ID: 2699722 • Letter: D
Question
Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is considering changing the capital structure so wd = 60.0% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd. 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 wd 20% Current beta, bL1 5.00% 40% 6.00% 20% Risk-free rate, rRF 5.00% Tax rate, T 40% Market risk premium, RPM 6.00% Current wd 20% Current beta, bL1
Explanation / Answer
4.50%
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