A firm has zero debt in its capital structure. Its overall cost of capital is 10

Question

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 80% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, what is the cost of equity capital with the new capital structure?

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 80% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, what is the cost of equity capital with the new capital structure?

Explanation / Answer

0.8*2% + 0.8*x=10

So x=10.5%

the cost of equity capital=10.5%

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