Question

**The Bonnie Situation Int'l
Inc. currently has 60 percent debt in its capital structure, the
corporate tax rate is 0.35 and the before tax cost of debt,
r _{d}, is the same as the risk‑free rate. Given the
following market parameters,**

**
r _{m} = 9% , r_{f} =3.75% , ß_{L} =
1.07**

**Find the cost of equity, the
weighted average cost of capital, the operating risk, i.e.,
ß _{u} , the cost of equity if The Bonnie Situation Int'l
Inc. were unlevered.**

Please show work

Answer #1

WACC = Weight of Debt * Cost of Debt*(1-Tax Rate)+ Weight of Equity
* Cost if Equity = 60%*3.75%*(1-0.35)+40%*9.37% =5.21%

Cost of Unlevered Beta = Beta Levered/(1+(1-Tax Rate)*Debt/Equity)
= 1.07/(1+(1-0.35)*60%/40%) = 0.5418

Cost of equity(operational Risk) = Risk free rate + Beta* (Market
return - Risk Free Rate) = 3.75% + 0.5418*(9%-3.75%) = 6.59%

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