Gamer Co. has no debt. Its cost of capital is 10.9 percent. Suppose the company

Question

Gamer Co. has no debt. Its cost of capital is 10.9 percent. Suppose the company converts to a debt–equity ratio of 1. The interest rate on the debt is 8 percent. Ignore taxes for this problem.

What is the company’s new cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity             %

What is its new WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC             %  

Explanation / Answer

When company has no debt then cost of equity and cost of capital is same. When company converts capital structure into debt - Equity then cost of capital will change. But, cost of equity will be same. So, Cost of equity 10.90% Since debt euity ratio becomes 1.It means debt and equity are equal. So, weight of: Debt 0.5 Equity 0.5 and WACC = (0.5*8%)+(0.5*10.9%) = 9.45%

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