ques 7 Malkin Corp. has no debt but can borrow at 6.5 percent. The firm\'s WACC
ID: 2758239 • Letter: Q
Question
ques 7
Malkin Corp. has no debt but can borrow at 6.5 percent. The firm's WACC is currently 10 percent, and there is no corporate tax. What is Malkin's cost of equity? If the firm converts to 30 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) If the firm converts to 55 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) What is Malkin's WACC in part (b) and (c)? (Do not round intermediate calculations. Enter your answers as a percentage rounded to the nearest whole number (e.g., 32).)Explanation / Answer
WACC = Wd×Rd+We×Ke
W is weights of respective portfolios
R is return on respective portfolios
Wd+We = 1
Ke = (WACC-Wd×Rd)÷We
a)
Ke = 10%%
b)
Ke = (10%-0.30×6.5%)÷0.70
= 11.5%
c)
Ke = (10%-0.45×6.5%)÷0.45
= 15.72%
d)
WACC = Wd×Rd+We×Ke
W is weights of respective portfolios
R is return on respective portfolios
Wd+We = 1
30% debt:
WACC = Wd×Rd+We×Ke
= 0.30×6.5%+0.7×11.5%
= 10%
55% debt:
WACC = Wd×Rd+We×Ke
= 0.55×6.5%+0.4×11.5%
= 8.18%
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