Question

A firm currently has a debt-equity ratio of 0.9. The debt, which is virtually riskless, pays an interest rate of 3 %. The expected rate of return on the equity is 12 %. What is the Weighted-Average Cost of Capital if the firm pays no taxes?

wacc = 7.74

What would happen to the expected rate of return on equity if the firm changed its debt-equity ratio to 0.1? Assume the firm pays no taxes, the cost of debt does not change, and that the original WACC is 7.74 %.

answer this^^ in bold

Answer 1

DATE Answer or Debt = 0.go equity) Debt-Equity Ratio = 0.90 Debt Go Equity = 1 0. 9o Equity to Equity = 1 Equity = 0.5263 kg = 3% ke = 12% Debt = 0.5263 (0) 0.90 = 0.4737 Debt (weight) 0.4737 Equity (weight) = 0.5263 WACC = We woke to Wa (x) ko 0-5262 127.6 0.4737 234. 6.31566) 1.42117. WACC 7.73677. or 7.744. New Dest Equity = 0.10 (or Debt = 0.1o Equity ) Debt an Equity - 1 0 %o Equity As Equity = 1 · Egyity = 0.9090 Debt = 0.0 (N90-909. → 0-0909 0 90 90 x ke to - 0-090909 39. 7.73677. = 7.14% - 0.2727. o gogo ke z 8.214 CSI Scanned with Can Seatter classmate