The Tech Hardware Company is trying to estimate its optimal capital structure. Tech's current capital structure consists of 20% debt and 80% equity; however, management believes the firm should use more debt. The risk-free rate is 1.3%, the market risk premium is 6%, and the firm's tax rate is 35%. Currently, Tech's cost of equity is 16%, which is determined on the basis of the CAPM.
a Determine Tech's current beta.
b What would be Tech's unlevered beta?
c If Tech were to change its capital structure from its current one so to have its assets and operations finance with 45% debt, determine its beta under this new capital structure.
d Determine Tech's new cost of equity under the new capital structure with 45% debt.
e If the cost of debt were 6%, what would be Tech's weighted average cost of capital under the new capital structure with 45% debt?
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