An internet services provider is considering changing its capital structure. The firm's beta is 1.25, the current risk-free rate of return is 5.50%, and the market risk premium is 7.50%. Return on equity was 16.50% at its current capital structure. The company projects its cost of equity will be 12.65% at its optimal capital structure. The market value of the firm's equity is currently $4 billion.
A) What will be the expected net gain in firm value by moving to the optimal capital structure?
A. $68.9 million
B. $76.3 million
C. $89.2 million
D. $93.9 million
B) What is the company's current equity return differential?
A. -2.54%
B. 1.63%
C. 3.13%
D. None of the above