Kunitz Co. has no debt. Its cost of capital is 9.9 percent. Suppose Kunitz conve
ID: 2742513 • Letter: K
Question
Kunitz Co. has no debt. Its cost of capital is 9.9 percent. Suppose Kunitz converts to a debt-equity ratio of 1. The interest rate on the debt is 7 percent. Ignore taxes for this problem.
What is the company’s new cost of equity? (Do not round intermediate calculations. Enter youd answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is its new WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Requirement 1:What is the company’s new cost of equity? (Do not round intermediate calculations. Enter youd answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Answer What is cost of equity ? Answer Cost of Equity 12.80% Ra = 9.9% Re = Ra+(Ra-Rd)(D/E) Re = 0.099+(0.099-.07)*1 Re = 0.128 or 12.80% What is new WACC ? Answer WACC 9.90% Securities Wt Cost Wt*cost Equity 50% 12.80% 6.40% Debt 50% 7.00% 3.50% Total 100% 9.90%
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