Braxton Corp. has no debt but can borrow at 7 percent. The firm\'s WACC is curre

Question

Braxton Corp. has no debt but can borrow at 7 percent. The firm's WACC is currently 8.8 percent, and the tax rate is 35 percent. a. 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.) Cost of equity 8.8 % b. If the firm converts to 15 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.) Cost of equity c. If the firm converts to 40 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.) Cost of equity d-1 If the firm converts to 15 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.) WACC d-2 If the firm converts to 40 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.) WACC

Explanation / Answer

a

cost of equity=8.8%

b.

cost of equity=8.8%+(8.8%-7%)*(15%/85%)*(1-35%)=9.01%

c.

cost of equity=8.8%+(8.8%-7%)*(40%/60%)*(1-35%)=9.58%

d.

WACC=85%*9.01%+15%*7%*(1-35%)=8.34%

e.

WACC=60%*9.58%+40%*7%*(1-35%)=7.57%

the above is the answer

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