Braxton corp. has no debt but can borrow at 6.2 percent. the form\'s WACC is cur
ID: 2733560 • Letter: B
Question
Braxton corp. has no debt but can borrow at 6.2 percent. the form's WACC is currently 8 percent, and the tax rate is 35 percent. What is the company's cost equity? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) if the form converts to 20 percent debt, what will its cost of equity be? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) if the form converts to 50 percent debt, what will its cost of equity be? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) if the converts to 20 percent debt, what will its cost of equity be? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) if the converts to 50 percent debt, what will its cost of equity be? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.)Explanation / Answer
Answer
(A)
%
Cost of Equity
8%
(B)
Cost of Equity
6.40%
( c )
Cost of Equity
5%
(D)1
WACC
7.21%
(D)2
WACC
6.02%
Working notes for the above answer is as under
WACC = w(d)*k(d)*(1-t) + w(e)*k(e)
Where:
w(d) = % debt in capital structure
w(e) = % equity in capital structure
k(d) = cost of debt
k(e) = cost of equity
t = tax rate
So:
a)
8% = 0% * 8.3% * (1-35%) + 100% * k(e)
8% = 100% * k(e)
k(e) = 8%
So your cost of equity with no debt is your WACC,
b)
WACC = 20% * 6.2 * (1-35%) + 80% * 8%
Weighted cost of equity = 80% * 8% =6.4
d (for b): WACC = 20% * 4.03 * (1-35%) + 80% * 8%
=7.21%
c)
WACC = 50% * 6.2 * (1-35%) + 50% * 8%
Weighted cost of equity = 50% * 8% = 5%
d (for c): WACC = 50% * 4.03 * (1-35%) + 50% * 8%
= 6.02%
D)
(A)
%
Cost of Equity
8%