Braxton Corp. has no debt but can borrow at 8.1 percent. The firm’s WACC is curr
ID: 2742598 • Letter: B
Question
Braxton Corp. has no debt but can borrow at 8.1 percent. The firm’s WACC is currently 9.9 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 25 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 25 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.)
Braxton Corp. has no debt but can borrow at 8.1 percent. The firm’s WACC is currently 9.9 percent, and the tax rate is 35 percent.
Explanation / Answer
a) Cost of equity when there is no debt is nothing but Weighted Average cost of capital, so 9.9% b) % weight in cost of debt is 25% and % weight in cost of equity is 75% So, Cost of equity 75% of 9.9%, comes to 7.425% WACC= 0.25*0.081(1-0.35)+0.75*0.099 = 0.013 + 0.07425 = 0.08725 * 100 = 8.725% cost of equity = 8.725% c) % weight in cost of debt is 50% and % weight in cost of equity is 50% So, Cost of equity 50% of 9.9%, comes to 4.95% WACC= 0.50*0.081(1-0.35)+0.50*0.099 = 0.02632 + 0.04950 = 0.0758 * 100 = 7.58% cost of equity = 7.58% d) 1 Weighted average cost of capital if firms converts 25% to debt capital Before tax tax after tax weight WACC Cost of equiry 8.725 8.7250 0.75 6.54375 cost of debt 2.475 (1-0.35) 1.8563 0.25 0.46406 7.00781 d) 2 Weighted average cost of capital if firms converts 50% to debt capital Before tax tax after tax weight WACC Cost of equiry 4.95 4.9500 0.5 2.47500 cost of debt 4.95 (1-0.35) 3.7125 0.5 1.85625 4.33125 Note : tax rate is 35%