HiFlyer Corporation does not currently have any debt. Its tax rate is .4 and its unlevered beta is estimated by examining comparable companies to be 2.0. The 10-year Treasury bond rate is 6.25% and the historical risk premium over the risk free rate is 5.5%. Next year, HiFlyer expects to borrow up to 75% of its equity value to fund future growth.
a. Calculate the firm's current cost of equity.
b. Estimate the firm's cost of equity after it increases its leverage to 75% of equity?

Question

Quizplus · Accepted Answer

The Answer of HiFlyer Corporation does not currently have any debt. Its tax rate is .4 and its unlevered beta is estimated by examining comparable companies to be 2.0. The 10-year Treasury bond rate is 6.25% and the historical risk premium over the risk free rate is 5.5%. Next year, HiFlyer expects to borrow up to 75% of its equity value to fund future growth.
a. Calculate the firm's current cost of equity.
b. Estimate the firm's cost of equity after it increases its leverage to 75% of equity?

HiFlyer Corporation Does Not Currently Have Any Debt