Chandeliers Corp. has no debt but can borrow at 7.1 percent The firm?s WACC is c
ID: 2383249 • Letter: C
Question
Chandeliers Corp. has no debt but can borrow at 7.1 percent The firm?s WACC is currently 8.9 percent and the tax rate is 35 percent a. What s the company?s cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % b. If the firm converts to 25 percent debt, what will its cost of equity be? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % c. If the firm converts to 60 percent debt, what will its cost of equity be?(Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % d-1 If the firm converts to 25 percent debt, what is the company?s WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC % d-2 If the firm converts to 60 percent debt, what is the company?s WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC %Explanation / Answer
Answer:
a). Chandeliers corp has no debt and all equity in its capital structure.
The current WACC with 100% equity in its captial structure is 8.9% (given)
It implies that :Cost of equity(Ke)*Weight of equity = 8.9% =>Ke*100% = 8.9%
=>Ke= 8.9% (ans)
b). If the firm converts to weight of Debt:Equity in the ratio of 25%:75%.
Assuming the firm want's to hold the WACC constant = KD(1-t)*WD + Ke*We = 7.1(1-0.35)*0.25+Ke*0.75 = 8.9%
=> Ke = 10.33%
c) If the firm converts to weight of Debt:Equity in the ratio of 60%:40%
Assuming the firm want's to hold the WACC constant = KD(1-t)*WD + Ke*We = 7.1(1-0.35)*0.6+Ke*0.4 = 8.9%
=> Ke = 15.33%
d) If the firm converts to weight of Debt:Equity in the ratio of 25%:75%.
Assuming the firm does not want to hold the WACC constant = WACC = KD(1-t)*WD + Ke*We
= 7.1(1-0.35)*0.25+8.9*0.75 = 7.83%
e) If the firm converts to weight of Debt:Equity in the ratio of 60%:40%
Assuming the firm want's to hold the WACC constant = KD(1-t)*WD + Ke*We = 7.1(1-0.35)*0.6+8.9*0.4 = 6.33%
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