Malkin Corp. has no debt but can borrow at 6.5 percent. The firms WACC is curren

Question

Malkin Corp. has no debt but can borrow at 6.5 percent. The firms WACC is currently 10 percent, and there is no corporate tax. Required: (a) What is Malkins cost of equity? Cost of equity % (b) If the firm converts to 10 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % (c) If the firm converts to 45 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % (d) What is Malkins WACC in part (b) and (c)? (Do not round intermediate calculations. Enter your answers as a percentage rounded to the nearest whole number (e.g., 32).) WACC 10 percent % 45 percent %

Explanation / Answer

a)

since there is no debt

cost of equity = WACC = 10%

b)

wacc = weight of equity * cost of equity + weight of debt * cost of debt

10% = 0.9 * cost of equity + 0.1 * 6.5%

cost of equity = 10.39%

c)

10% = 0.55 * cost of equity + 0.45 * 6.5%

cost of equity = 12.86%

d)

WACC = 0.9 * 10.39% + 0.1 * 6.5% = 10%

at 45%
]
WACC = 10%

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