Problem
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 9% and the market risk premium, rM ? rRF, is 7.5%. Currently the company's cost of equity, which is based on the CAPM, is 18% and its tax rate is 40%. What would be Simon's estimated cost of equity if it.