Question

Citee Corp. has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 8.7 percent, and the tax rate is 23 percent. a. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the firm converts to 30 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.) c. If the firm converts to 55 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.) d-1. If the firm converts to 30 percent debt, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d-2. If the firm converts to 55 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

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ans a
	since company has not debt its cost of equity = WACC = 8.70%
ans b	cost of equity using MM proposition =
				=8.7%+(8.7%-6.5%)*(.3/.7)*(1-23%)
				9.43%
	therefore cost of equity =			9.43%
ans c
	cost of equity using MM proposition =
				=8.7%+(8.7%-6.5%)*(.55/.45)*(1-23%)
				10.77%
	therefore cost of equity =			10.77%
ans d-1
	WACC = weight of debt * post tax cost of debt + wegith of equity * cost of equity
		=30%*6.5%*(1-23%)+70%*9.43%
		8.1%
ans d-2
	WACC = weight of debt * post tax cost of debt + wegith of equity * cost of equity
		=55%*6.5%*(1-23%)+45%*10.77%
		7.60%