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Solution contains calculations of weighted average cost of capital.

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Figuring the WACC, the unlevered beta & WACC with new capital structure

As the Vice President of a Finance company with the following available data:

Total assets $ 10,000,000.00
Debt $ 2,500,000.00
common equity $ 7,500,000.00
before tax cost of debt 12.00%
risk-free rate 5.00%
Market Return 16.00%
beta at current capital structure 1.20
Tax Rate 40%

What is my firms's current Weighted Average Cost of Capital (WACC)?

What is my firm's unlevered beta?

If I am considering changing my firm's capital structure to 40% debt and 60% common equity, to make this change, I will issue additional debt and use the proceeds to repurchase common stock. If I do this, the before tax cost of debt will rise to 14%. What would be my firm's WACC if you adopt this new capital structure?

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