Chandeliers Corp. has no debt but can borrow at 7.1 percent. The firm’s WACC is

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 is 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

1) Cost of Equity, if 100% equity if 100% is equity, and WACC is 8.9%, then Cost of equity = 8.9%. i.e. equals to WACC. 2) If Debt is 25%, Cost of Equity Ratio Rate after tax Interest cost Debt 25 7.10% 4.6%           1.15 Equity 75 10.3%           7.75 (8.9-1.15) 100 8.9 Cost of Equity = 7.75/75 =10.3% 3) If Debt is 60%, Cost of Equity Ratio Rate after tax Interest cost Debt 60 7.10% 4.6%           2.77 Equity 40 15.3%           6.13 100 8.9 Cost of Equity = 6.13/40 =15.3% 4) If Debt is 25%, WACC Ratio Rate after tax Interest cost Debt 25 7.10% 4.6%           1.15 Equity 75 8.9%           6.68 100 7.83%           7.83 WACC= 7.83/100= 7.83% 4) If Debt is 60%, WACC Ratio Rate after tax Interest cost Debt 60 7.10% 4.6%           2.77 Equity 40 8.9%           3.56 100 6.33%           6.33 WACC= 6.33/100= 6.33%

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