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Parkville Corp has just completed a recapitalization which raised its debt/equity ratio to 3, it’s equity beta to 2.2, and it’s debt beta to 0.5. Before the recapitalization, the firm’s debt/equity ratio was 0.5 and it’s debt was risk-free. The risk-free rate is 3% and the expected return on the market is 8%. Assume perfect capital markets.
a) What is Parkville’s unlevered beta? b) What was the beta of Parkville stock before the recapitalization? c) What is Parkville’s cost of equity before and after the recapitalization? d) Did Parkville’s cost of equity change after the recapitalization? Briefly explain why or why not.
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