Can someone help me with this please... The Nantucket Nugget is unlevered and is
ID: 2632817 • Letter: C
Question
Can someone help me with this please...
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in its capital structure would increase its value. The current of cost of equity is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%.
(1) What is the new levered cost of equity?
(2) What will Nantucket's new weighted average cost of capital (WACC) be?
Explanation / Answer
New Firm Value: $640,000 + (.0) ($300,000) = $640,000 Capital Structure = D + E = 300,000 + 340,000 .12 + (300/340)*(.12 - .08) = .12 + .0353 = .1553 WACC = (300/640)*(.08) + (340/640)*(.1553) = .0375 + .0825 = .12 The value of the firm stays at $640,000 the cost of levered equity rises to 15.53% and the WACC remains at 12%.