Calculating WACCShadow corp. has no debt but can borrow at 6.5%. The f

QUESTION

Calculating WACCShadow corp. has no debt but can borrow at 6.5%. The firms WACC is currently 10.4% and the tax rate is 35%a) What is Shadows cost of equity?b) If the firm converts to 25% debt, what will its cost of equity be?c) If the firm converts to 50% debt, what will its cost of equity be?d) Wh
a) Cost of equity = 10.4% as corp. has no debt so its equal to WACC. b) Cost of equity will be 11% in case b and c because cost of equity will not change but WACC will change WACC = Wd*Kd(1-tax) We * Ke = .25 * 6.5(1-0.35) .75 * 10.4 1.05625 7.8 = 8.85625 % or 8.9% =WACC Weighted

cost of ke = 7.8% c) WACC = Wd*Kd(1-tax) We * Ke = .50 * 6.5(1-0.35) .50 * 11 = 2.1125 5.5 = 7.6125% or 7.6% = WACC Weighted cost of ke = 5.5% d)WACC in part b = 8.9% WACC in part c = 7.6%

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