Problem 16-13 Calculating WACC Shadow Corp. has no debt but can borrow at 8.0 pe
ID: 2613560 • Letter: P
Question
Problem 16-13 Calculating WACC
Shadow Corp. has no debt but can borrow at 8.0 percent. The firm’s WACC is currently 9.8 percent, and the tax rate is 35 percent.
What is Shadow’s cost of equity? (Do not round intermediate calculations.)
If the firm converts to 15 percent debt, what will its cost of equity be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If the firm converts to 50 percent debt, what will its cost of equity be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If the firm converts to 15 percent debt, what will the company's WACC be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If the firm converts to 50 percent debt, what will the company's WACC be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Shadow Corp. has no debt but can borrow at 8.0 percent. The firm’s WACC is currently 9.8 percent, and the tax rate is 35 percent.
Explanation / Answer
(A) Since the firm has no debt now, therefore its capital structure only contains equity. Therefore, its WACC = Cost of Equity WACC = Cost of Equity = 9.8% (B) If The firm converts to 15% Debt, cost of equity will remain the same therefore Cost of Equity = 9.8% (C) If The firm converts to 50% Debt, cost of equity will remain the same therefore Cost of Equity = 9.8% (D-1) Name cost Tax Cost after tax Weight WACC (A) (B) (C= A-B) D C*D Equity 9.8 0 9.8 0.85 8.33 Debt 8 2.8 5.2 0.15 0.78 Total WACC 9.11 (D-2) Name cost Tax Cost after tax Weight WACC (A) (B) (C= A-B) D C*D Equity 9.8 0 9.8 0.5 4.9 Debt 8 2.8 5.2 0.5 2.6 Total WACC 7.5