Question

Shadow Corp. has no debt but can borrow at 6.7 percent. The firm's WACC is currently 9.5 percent and the tax rate is 24 percent. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 30 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 60 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d-1. If the firm converts to 30 percent debt, what is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d-2. If the firm converts to 60 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.) а. b. C. Cost of equity % а. b. Cost of equity % Cost of equity b. % d-1. WACC d-2. WACC %

Answer 1

Re WACC a) 9.50% b) converts to 30 percent debt: Re= Ra+(Ra-Rd) (D/E) (1-t) Ra unlevered cost of equity 10.41 % 0.095+((0.095-0.067)*(0.3/0.7)"(0.76)) c) converts to 60 percent debt: Re Ra (Ra-Rd) (D/E) (1-t) Ra unlevered cost of equity 12.69% 0.095+((0.095-0.067) *(0.6/0.4)*(0.76) ) d-1) |d-2) converts to 30 percent debt: converts to 60 percent debt: WACC: WACC: Particulars weighted cost 0.072884 0.015276 8.82% WACC Particulars weight cost weight weighted cost Cost 0.4 12.69% 10.41% 0.050768 Equity 0.7 Equity Debt 5.09% Debt 0.030552 0.3 0.6 5.09% 8.13% WACC