Question

Malkin Corp. has no debt but can borrow at 6.75 percent. The firm’s WACC is currently 12 percent, and there is no corporate tax.

a. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.)

Cost of equity             %

b. If the firm converts to 10 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity             %

c. If the firm converts to 50 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity             %

d. What is the company’s WACC in parts (b) and (c)? (Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.)

	WACC
10 percent	%
50 percent	%

Answer 1

a) At no debt cost of equity as WACC =12%

b) Debt =10%
Equity =90%
When tax rate=0 then WACC will remain same at 12%
WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt
12% =90%*Cost of Equity+10%*6.75%
Cost of Equity =(12%-10%*6.75%)/90% =12.58%

c) Debt =50%
Equity =50%
When tax rate=0 then WACC will remain same at 12%
WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt
12% =50%*Cost of Equity+50%*6.75%
Cost of Equity =(12%-50%*6.75%)/50% =17.25%

d) At 10% WACC =12%
At 50% WACC =12%
At 0 tax rate WACC remains same.