Problemsimon software co currently has a capital structure, Ask an Expert

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Problem:

Simon Software Co. currently has a capital structure that consists of 20 percent debt and 80 percent equity. (Its D/E ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, Rm - Rrf, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent.

Required:

What would be Simon's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity? (Hint: Use the Hamada equations.)

14.35%

30.00%

14.72%

15.60%

13.64%

Give explanation comprehensively and provide step by step solution.

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Category:- Basic Finance
Reference No.:- M91147242

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