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))

What is the company’s cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer :-

Cost of debt(Kd) = 7.2%

WACC = 9%

Tax rate = 35%

a.) If Debt (Wd) = 0% and Equity(We) = 100 - 0 = 100%

   WACC = [ Kd * Wd * (1-tax rate) ] + [ Ke * We ]

9 = [ 7.2 * 0% * (1-35%) ] + [ Ke * 100% ]

9 = 0 + Ke

Cost of Equity (Ke) = 9 %

b.) If Debt (Wd) = 20% and Equity(We) = 100 - 20 = 80%

   WACC = [ Kd * Wd * (1-tax rate) ] + [ Ke * We ]

9 = [ 7.2 * 20% * (1-35%) ] + [ Ke * 80% ]

9 = .936 +.80 Ke

8.064 = .80 Ke

Cost of Equity (Ke) = 10.08 %

c.) If Debt (Wd) = 60% and Equity(We) = 100 - 60 = 40%

   WACC = [ Kd * Wd * (1-tax rate) ] + [ Ke * We ]

9 = [ 7.2 * 60% * (1-35%) ] + [ Ke * 40% ]

9 = 2.808 +.40 Ke

Cost of Equity (Ke) = 15.48 %

d.) 1.) If Debt (Wd) = 20% and Equity(We) = 100 - 20 = 80%

   WACC = [ Kd * Wd * (1-tax rate) ] + [ Ke * We ]

= [ 7.2 * 20% * (1-35%) ] + [ 10.08 * 80% ]

= .936 + 8.064

  WACC = 9 %

d.) 2.) If Debt (Wd) = 60% and Equity(We) = 100 - 60 = 40%

   WACC = [ Kd * Wd * (1-tax rate) ] + [ Ke * We ]

= [ 7.2 * 60% * (1-35%) ] + [ 15.48 * 40% ]

= 2.808 + 6.192

WACC = 9 %

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