Kunitz Co. has no debt. Its cost of capital is 8.7 percent. Suppose Kunitz conve

Question

Kunitz Co. has no debt. Its cost of capital is 8.7 percent. Suppose Kunitz converts to a debt-equity ratio of 1.0. The interest rate on the debt is 6.3 percent. Ignore taxes for this problem. Requirement 1: What is the company's new cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % Requirement 2: 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).) WACC %

Explanation / Answer

Cost of equity = (cost of capital - Cost of Debt*Weight of Debt)/Weight of Equity

cost of capital = 8.7 %

Cost of Debt = 6.3%

Weight of Debt = 1/(1+1) = 50%

Weight of Equity = 1 - 50% = 50%

Cost of equity = (8.7% - 6.30%*50%)/50%

Cost of equity = 11.1%.

b.

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