Braxton Corp. has no debt but can borrow at 7.4 percent. The firm\'s WACC is cur

Question

Braxton Corp. has no debt but can borrow at 7.4 percent. The firm's WACC is currently 9.2 percent, and the tax rate is 35 percent. What is the company's cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 35 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 60 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 35 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.) If the firm converts to 60 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.)

Explanation / Answer

1)WACC = w(d)*k(d) * (1-tax rate) + w(e) +K(e)

9.2% = 0%*7.4%*(1-35%)+100%+k(e)

9.2%v = 0%+100%k(e)

k(e) = 9.2%

When there is no debt , Weighted Cost of equity is equal to weighted average cost of capital.

2) WACC = 9.2%, weight of Debt = 35%, weight of equity = 65%

Weighted Cost of equity = Weight of equity w(e) x cost of Equity k(e)

Weighted Cost of equity = 65% x 9.2% = 5.98%

3) Weight of Debt w(d) = 60%, Weight of Equity k(e) = 40%

Weighted cost of equity = 40% x 9.2% = 3.68%

4) WACC = W(d)*K(d)*(1-tc)+k(e)*w(e)

WACC = 35%x 7.4%*(1-35%)+9.2%*65%

WACC = 7.66%

5) WACC = W(d)*K(d)*(1-tc)+k(e)*w(e)

WACC = 60%x 7.4%*(1-35%)+9.2%*40%

WACC = 6.57%

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