Chandeliers Corp. has no debt but can borrow at 7.8 percent. The firm’s WACC is

Question

Chandeliers Corp. has no debt but can borrow at 7.8 percent. The firm’s WACC is currently 9.6 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 30 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 50 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 30 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 50 percent debt, what is the company’s WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC %

Explanation / Answer

a-

When firm has no Debt then Cost of Equity is the Weighted Average Cost of Capital.

WACC as given in the question 9.6% and Cost of Equity is already after tax,

So, Cost of Equity =WACC= 9.6%

Cost of Equity is 9.6%.

b-

Thus, Cost of Equity is 11.54%

WACC Weight of Equity*Cost of Equity+Weight of Debt*After tax Cost of Debt 9.6 (.7*Cost of Equity)+(.3*5.07) 9.6 (.7*Cost of Equity)+1.52 8.08 (.7*cost of equity) Cost of Equity 11.54

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