Desk Software Co. is trying to estimate its optimal capital structure.
Right now, Desk has a capital structure that consists of 20 percent
debt and 80 percent equity, based on market values. (Its D/S ratio is
0.25.) The risk-free rate is 6 percent and the market risk premium, rM
? rRF, is 5 percent. Currently the company?s cost of equity, which is
based on the CAPM, is 12 percent and its tax rate is 40 percent. What
would be Desk?s estimated cost of equity if it were to change its
capital structure to 50 percent debt and 50 percent equity?