Braxton Corp. has no debt but can borrow at 6.9 percent. The firm’s WACC is curr

Question

Braxton Corp. has no debt but can borrow at 6.9 percent. The firm’s WACC is currently 8.7 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 35 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 40 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 35 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 40 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.)

Braxton Corp. has no debt but can borrow at 6.9 percent. The firm’s WACC is currently 8.7 percent, and the tax rate is 35 percent.

Explanation / Answer

If company has no debt, then WACC becomes equal to cost of equity

because WACC = cost of debt * debt weight*(1-tax) + cost of equity*equity weight

= cost of equity = 8.7%

b)

debt weight .35, equity weight .65

then wacc = .35*(.069)*(1-.35) + .65 *cost of equity

wacc is 8.7%

so cost of equity = .1096 or 10.96%

c) debt is 0.4, equity is 0.6

putting in values in WACC equation

.087 = .4*.65*.069 + .6 * cost of equity

thus cost of equity = 0.1151 or 11.51%

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