Chandeliers Corp. has no debt but can borrow at 7.2 percent. The firm\'s WACC is

Question

Chandeliers Corp. has no debt but can borrow at 7.2 percent. The firm's WACC is currently 9.0 percent, and the tax rate is 35 percent. What is the company's cost of equity? (Round your answer to 2 decimal places, (e.g., 32.16)) If the firm converts to 20 percent debt, what will its cost of equity be? (Round your answer to 2 decimal places, (e.g., 32.16)) 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)) If the firm converts to 20 percent debt, what is the company's WACC?(Round your answer to 2 decimal places, (e.g., 32.16)) 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))

Explanation / Answer

a) at present there is no debt so wacc is the cost of equity = 9%

b)if firm converts to 20% debt

wacc =9%

cost of debt =7.2%

taxrate = 35%

wacc=0.20*7.2(1-0.35)+0.8*cost of equity

9%= 0.20*4.68+0.8*cost of equity

cost of equity =( 9%-0.936%)/0.8

=10.08%

c)

if firm converts to 60% debt

wacc =9%

cost of debt =7.2%

taxrate = 35%

wacc=0.60*7.2(1-0.35)+0.4*cost of equity

9%= 0.60*4.68+0.4*cost of equity

cost of equity =( 9%-2.808%)/0.4

=15.48%

d)-1)

if firm converts to 20% debt

cost of equity =9%

cost of debt =7.2%

taxrate = 35%

wacc=0.20*7.2(1-0.35)+0.8*9%

= 0.936%+7.2%

= 8.136%

d2)

if firm converts to 60% debt

cost of equity =9%

cost of debt =7.2%

taxrate = 35%

wacc=0.60*7.2(1-0.35)+0.4*9%

= 2.808%+3.6%

= 6.408%

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