contestada

xyz corp is currently has a debt-to-enterprise value ratio of 40%. its current cost of equity is 15% and its current cost of debt is 5%. the firm wants to permanently change its financing policy to target a debt-to-enterprise value ratio of 13%. the cost of debt associated with this new financing policy will also be 5%. assuming perfect markets, what will xyz's cost of equity be after it implements this new financing policy? express your answer in percent and round to two decimals (do not include the %-symbol in your answer).

Respuesta :

The xyz's cost of equity be after it is 11.98

Current Debt-to-Enterprise Value Ratio = 40%

assuming that debt and equity make up the entire enterprise value.

Equity to Enterprise Value Ratio is therefore 60% (100%-40%).

Calculating unlevered Cost of capital:-

Unlevered Cost of capital = (Weight of Debt)(Cost of Debt) + (Weight of Equity)(Cost of Equity)

Unlevered Cost of capital = (0.40)(5%) + (0.60)(15%)

Unlevered Cost of capital = 2% + 9%

Unlevered Cost of capital = 11%

The company wants to change its financing strategy permanently and aim for a debt-to-enterprise value ratio of 14%.

As Enterprise Value consists of Debt and equity only, Equity to Enterprise Value Ratio is 86% (100%-14%)

Calculating the Cost of equity after change in financial Policy:-

Unlevered Cost of capital = (Weight of Debt)(Cost of Debt) + (Weight of Equity)(Cost of Equity)

11% = (0.14)(5%) + (0.86)(Cost of Equity)

11% = 0.7% + 0.86*Cost of Equity

Cost of Equity = 11.98%

Learn more about Cost of equity visit https://brainly.com/question/25651634

#SPJ4

Otras preguntas