Question

Triangle Enterprises has no debt but can borrow at 8 percent. The firm's WACC is currently 13.2 percent, and there is no corporate tax. If the firm converts to 30 percent debt, what will its cost of equity be?

16.67 percent

12.95 percent

14.47 percent

16.39 percent

15.43 percent

Answer 1

If weight of debt = 30%

Then, weight of equity = 100% - weight of debt

= 100% -30%

= 70%

WACC = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)

13.2% = (30%*8%)+(70%*Cost of Equity)

13.2% = 2.4% +70%*Equity

Equity = (13.2%-2.4%)/70%

= 15.43 percent

Answer = 15.43 percent