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Problem:

Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 35% debt and 65% equity; however, the CEO believes the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, Cyclone's cost of equity is 15%, which is determined by the CAPM.

Required:

Question: What would be Cyclone's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?

Note: Explain all steps comprehensively.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91166041

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