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Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 13 percent. I

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Answer #1

Cost of equity for the levered firm = kSU + D/S(kSU - kD)

kSU = 13% or 0.13, D = 8,000 and S = 5000/0.13 - 8000 = 30,461.54. kD = 6%

Thus cost of equity = 0.13 + 8000/30461.54*(0.13 - 0.06)

= 14.84%

WACC = S/V * kSU + D/V*kD

= 30461.54/38461.54 * 14.84% + 8000/38461.54* 6%

= 13.00%

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