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You are the CFO of an all-equity firm whose potential values in 1 year are shown below. Each economic state is equally-likely and you live in a world in which markets are perfect. The current required return for equity holders is 10%. Economic State: Good Bad Cash Flow 1500 954 Suppose you decide to issue $500 in debt today that will be paid off in 1 year (e.g., the current value of the debt is $500). The current risk free rate is 3%. What is the new return that shareholders will demand based on this change in capital structure? Express your answer in percentage terms rounded to two decimal places (e.g., 11.25 not 0.1125).

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Financial Management, Finance

Category:- Financial Management
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