A Company currently has one million shares outstanding but no debt. If needed, h

Question

A Company currently has one million shares outstanding but no debt. If needed, however, the company can borrow at 7.7 percent interest. The company's WACC is currently 9.5 percent  and the tax rate is 35 percent.

What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the firm converts to 20 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the firm converts to 50 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the firm converts to 20 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the firm converts to 50 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

A Company currently has one million shares outstanding but no debt. If needed, however, the company can borrow at 7.7 percent interest. The company's WACC is currently 9.5 percent  and the tax rate is 35 percent.

Explanation / Answer

a.

cost of equity=9.5%

b.

cost of equity=9.5%+(9.5%-7.7%)*(20%/80%)*(1-35%)=9.79%

c.

cost of equity=9.5%+(9.5%-7.7%)*(50%/50%)*(1-35%)=10.67%

d.

WACC=80%*9.79%+20%*7.70%*(1-35%)=8.83%

e.

WACC=50%*10.67%+50%*7.70%*(1-35%)=7.84%

the above is the answer

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