Question: Howard Callahan Inc.'s (HCI) capital structure is currently 15% debt and 85% equity, and its beta is 1.13. Its marginal tax rate is 34%. HCI anticipates a capital structure of 45% debt and 55% equity and an increase in its marginal tax rate to 39%. HCI has asked you to determine its projected beta based on its increased use of debt and its increased marginal tax rate.
Using the Hamada formulae, calculate the new beta levered (bL)
If the risk-free rate is 7% and kM is 15.61, calculate HCI's new ks (its discount rate).