Shadow Corp. has no debt but can borrow at 7.8 percent. The firm\'s WACC is curr

Question

Shadow Corp. has no debt but can borrow at 7.8 percent. The firm's WACC is currently 9.6 percent, and the tax rate is 35 percent. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the company converts to 30 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the company converts to 50 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the company converts to 30 percent debt, what will the companyA s WACC be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the company converts to 50 percent debt, what will the companyA s WACC be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Answer

we calculate WACC by the following formulae

= % debt in capital structure * cost of debt + % equity in capital structure * cost of equity

answer for part b

we assume WACC at 9.6% , Cost of equity will be calculated as follows

11%=30%*7.8(1-.35) + 70% * cost of equity

Cost of equity = 70% * 9.6% = 6.72%

anwer to part c

again assme WACC at 9.6%

11% = 50% * 7.8(1-.35)+ 50% * cost of euqity

cost of equity = 50% * 9.6% = 4.8%

answer to part d1 and d2

we assume cost of euity as 9.6%

for d1

WACC = 30% * 7.8%(1-.35) + 70% * 9.6%

= 8.24%

for d2

WACC = 50% * 7.8%(1-.35) + 50% * 9.6%

= 7.34 %

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