Corporate Finance, Module 16, "Debt Policy"

(The attached PDF file has better formatting.)

Updated: June 28, 2005

The risk-free interest rate is 10%, the expected return on the market portfolio is 18%, and a firm’s debt-to-equity ratio is 100%, so debt and equity each comprise 50% of capital. Assume the corporate tax rate is zero.

If the cost of debt capital is 12% and the beta of equity is 1.500, what are