Whispering Pines, Inc., is all-equity-financed. The expected rate of return on the company’s shares is 12%.
a. What is the opportunity cost of capital for an average-risk Whispering Pines investment?
b. Suppose the company issues debt, repurchases shares, and moves to a 30% debt-to- value ratio (D/V = .30). What will the company’s weighted-average cost of capital be at the new capital structure? The borrowing rate is 7.5% and the tax rate is 35%.
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