Using the proceeds to repurchase and retire common shares


Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is considering changing the capital structure so wd = 36.0% by issuing additional 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? Do not round your intermediate calculations. (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.) Risk-free rate, rRF 5.00% Tax rate, T 40% Market risk prem, RPM 6.00% Current wd 20% Current beta, bL1 1.65 Target wd 36.0%

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Financial Management: Using the proceeds to repurchase and retire common shares
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