You noticed that your firm’s debt has an overall lower cost of capital of 5% points compared with cost of equity of 15%. Therefore, you suggested to the financial manager of your firm that it should...

You noticed that your firm’s debt has an overall lower cost of capital of 5% points compared with cost of equity of 15%. Therefore, you suggested to the financial manager of your firm that it should increase its debt component in capital structure from 30% to 70% while reducing its equity component from 70% to 30% instead. To back your justifications, under this new arrangement, your firm’s cost of equity would be 20%.

i) Calculate, what would be the new cost of debt?

(4 marks)

ii) With this new arrangement, did you manage to reduce the overall cost of capital?