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Calculating WACC at different capital structures

Chandeliers Corp. has no debt but can borrow at 7.9 percent. The firm's WACC is currently 9.7 percent, and the tax rate is 35 percent.

a. What is the company's cost of equity?
b. If the firm converts to 35 percent debt, what will its cost of equity be?
c. If the firm converts to 50 percent debt, what will its cost of equity be?
d.
d-1. If the firm converts to 35 percent debt, what is the company's WACC?
d-2. If the firm converts to 50 percent debt, what is the company's WACC?

Solution Preview

a.
What is the company's cost of equity?

In absence of any debt, Cost of equity =WACC=9.70%

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=1-15%=65%
Cost of debt=rd=7.90%
Cost of equity without debt=ro=9.70% ...

Solution Summary

Solution depicts the steps to calculate WACC at different capital structures.

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