Braxton Corp. has no debt but can borrow at 6.2 percent. The firm\'s WACC is cur
ID: 2730623 • Letter: B
Question
Braxton Corp. has no debt but can borrow at 6.2 percent. The firm's WACC is currently 8 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 20 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 50 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 20 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 50 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
we solve all the problems as indepanded cases:-
ans. a) cost of equity in no debt compnay is eqal to WACC as no other information is given in question and we know that WACC calculated after tax ajustment .
so cost of equity is equal to 8% after tax
ans b) if the firm convert to 20% debt and the firm's wacc equal to 8% :-
debt cost 6.2% and after tax cost of debt = 6.2 * 0.65 = 4.03%
8%
so x = 8% - 0.806% = 7.194%
and cost of equity after tax = 7.194 / 0.80 = 9%
c) if the firm convert to 50% debt and the firm's wacc equal to 8% :-
x = 8% - 2.015% =5.985%
and cost of equity after tax 5.985 / 0.50 =11.97%
ans d-1) = firm convert to 20% equity and cost of equity of firm is 8%after tax then
WACC =
ans :- d-2) if the firm convert to 50% debt , then wacc
weight after tax cost WACC debt 0.2 4.03 0.806 equity 0.8 x/.80 x WACC of firm8%