Calculating WACC at different capital structures
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Chandeliers Corp. has no debt but can borrow at 7.4 percent. The firm's WACC is currently 9.2 percent, and the tax rate is 35 percent.
a. What is the company's cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16))
b. If the firm converts to 35 percent debt, what will its cost of equity be? (Round your answer to 2 decimal places. (e.g., 32.16))
c. If the firm converts to 60 percent debt, what will its cost of equity be?(Round your answer to 2 decimal places. (e.g., 32.16))
d-1 If the firm converts to 35 percent debt, what is the company's WACC?(Round your answer to 2 decimal places. (e.g., 32.16))
d-2 If the firm converts to 60 percent debt, what is the company's WACC?(Round your answer to 2 decimal places. (e.g., 32.16))
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Solution depicts the steps to calculate WACC at different capital structures.
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a. What is the company's cost of equity?
In absence of any debt, Cost of equity =WACC=9.20%
b. If the firm converts to 35 percent debt, what will its cost of equity be?
Tax Rate=35%
Debt=D=35%
Equity=E=1-D=1-35%=65%
Cost of debt=rd=7.40%
Cost of equity without debt=ro=9.20% ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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