Homework Answers
Beta levered =Beta Unlevered*((1+(1-Tax
Rate)*Debt/Equity)=1*((1+(1-40%)*2/3)=1.40
Beta levered =1.10
Beta Unlevered =Beta Levered/((1+(1-Tax Rate)*Debt/Equity)
=1.10/((1+(1-40%)*3/7))=0.875
With new capital ratio
Beta levered =Beta Unlevered*((1+(1-Tax
Rate)*Debt/Equity)=0.875*((1+(1-40%)*3/2)=1.6625
Cost of equity =Risk free Rate+Beta*(Market Return-Risk free
rate)=3%+1.6625*8% =16.30%
WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of
Debt*(1-Tax Rate) =2/5*16.30%+3/5*12%*(1-40%) =10.84%
(Closest Answer is 10.9%)
Option a and Option c is correct
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