Admiral Corp. has no debt but can borrow at 7 percent. The firm\'s WACC is curre

Question

Admiral Corp. has no debt but can borrow at 7 percent. The firm's WACC is currently 13 percent, and the tax rate is 36 percent. (round answers to 2 decimal points). I got (a) but cannot get (b), (c), or (d).

(a) Admiral's cost of equity is 13 percent.

(b) If the firm converts to 25 percent debt, its cost of equity will be _____ percent.

(c) If the firm converts to 50 percent debt, its cost of equtiy will be _____ percent.

(d) Admiral's WACC in parts (b) and (c) is _____ percent and _____ percent, respectively.

Explanation / Answer

(a) Admiral's cost of equity is 13 percent.

(b) If the firm converts to 25 percent debt, its cost of equity will be (.75x13)= 9.75%

(c) If the firm converts to 50 percent debt, its cost of equtiy will be (.5x13)=6.5%

(d) Admiral's WACC in parts (b) and (c) is _10.87_ percent and _8.74_ percent, respectively.

WACC in (b)= [.25x7x(1-.36)]+.75x13= 10.87%

WACC in (c)= [.5x7x(1-.36)]+.5x13= 8.74%

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