Question

Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same capital structure with a debt-to-equity ratio of 1/19. Recently, however, Dell hired many investment bankers and consultants at great expense, and decided to change its debt-to-equity ratio to 1/5. HP figures that they will copy Dell, and move their debt-to-cquity ratio to 1/5 as well HP doesn't want to pay for the bankers and consultants that Dell used. Thus, HP relies on you to help them understand the transition. Assume the ollowing: HP used to have a cost of cquity of 20%. Assume that regardless of its capital structure, HP's cost of debt is 3%. The change in DE is expected to be permanent. Further, HP's tax rate is 30%. [Step 1: de-levering] Find the cost of unlevered equity for HP. 0 A. 16.35% O B. 19.00% G. 19.15%, O D. 22.38% 13, [Step 2: Re-levering] Find the cost of levered equity for HP under the new capital structure (i.e. the debt-to- equity ratio of 1/5). A. 19.00% О в. 17.48% C. 19.1 5% O D. 22.38% 1 What is HP's new WACC? OA. 19.00% O B. 17.48% ° C. 19.15% O D. 22.38%

Answer 1

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