Question

Citee Corp. has no debt but can borrow at 6.3 percent. The firm’s WACC is currently 8.6 percent, and the tax rate is 21 percent.

  

a.	What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	If the firm converts to 20 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	If the firm converts to 45 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
d-1.	If the firm converts to 20 percent debt, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
d-2.	If the firm converts to 45 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a) Re = WACC = 8.60% converts to 20 percent debt: Re = Ra +(Ra-Rd) (D/E) (1-t) Ra = unlevered cost of equity = 9.05% 0.086+(0.086-0.063)*(0.2/0.8)*(0.79)) d-1) converts to 45 percent debt: Re = Ra +(Ra-Rd)(D/E)(1-t) Ra = unlevered cost of equity = 10.09% 0.086+((0.086-0.063)*(0.45/0.55)*(0.79)) converts to 20 percent debt: WACC: Particulars weight cost weighted cost Equity 0.85 9.05% 0.076961125 Debt 0.2 4.98% 0.009954 8.69% WACC converts to 45 percent debt: WACC: Particulars Equity Debt weight cost 0.55 10.09% 0.45 4.98% weighted cost 0.0554765 0.0223965 7.79% WACC