Gamer Co. has no debt. Its cost of capital is 9.8 percent.
Suppose the company converts to a debt–equity ratio of 1. The
interest rate on the debt is 6.9 percent. Ignore taxes for this
problem.
What is the company’s new cost of equity? (Do not round
intermediate calculations and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
Cost of equity : ____%
What is its new WACC? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.)
WACC: _____%
1)
New cost of equity = Cost of unlevered equity + (Cost of unlevered equity - cost of debt)debt-equity ratio
New cost of equity = 9.8% + (9.8% - 6.9%)1
New cost of equity = 9.8% + 2.9%
New cost of equity = 12.70%
2)
Weight of equity = 1 / (1 + D/E)
Weight of equity = 1 / (1 + 1)
Weight of equity = 0.5
Weight of debt = 1 - 0.5 = 0.5
WACC = 0.5*0.127 + 0.5*0.069
WACC = 0.0635 + 0.0345
WACC = 0.0980 or 9.80%
Gamer Co. has no debt. Its cost of capital is 9.8 percent. Suppose the company converts...
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