Dye Industries Currently Uses No Debt, but Its New CFO

question 81

Multiple Choice

Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 ? wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL ? rU? $$\begin{array} { l r l r } \text { Risk-free rate, } \mathrm { r } _ { \mathrm { RF } } & 6.00 \% & \text { Tax rate, } \mathrm { T } & 40 \% \\\text { Market risk premium, } \mathrm { RP } _ { \mathrm { M } } & 4.00 \% & \text { Current } \mathrm { w } _ { \mathrm { d } } & 0 \% \\\text { Current beta, } \mathrm { b } _ { \mathrm { U } } & 1.15 & \text { Target } \mathrm { w } _ { \mathrm { d } } & 40 \%\end{array}$$

• A) 1.66%
• B) 1.84%
• C) 2.02%
• D) 2.23%
• E) 2.45%

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Definitions:

New Ways

Innovative methods or approaches to addressing challenges or problems.

Old Ideas

Concepts, beliefs, or practices that have been prevalent in the past but may not be considered current or innovative.

Descriptive Statistics

Statistics that summarize or describe the characteristics of a data set, including measures like mean, median, and mode.

Inferential Statistics

A branch of statistics that makes predictions or inferences about a population based on a sample of data drawn from that population.