Malkin Corp. has no debt but can borrow at 6.00 percent. The firm?s WACC is curr

Question

Malkin Corp. has no debt but can borrow at 6.00 percent. The firm?s WACC is currently 11 percent, and there is no corporate tax. Required: (a) What is Malkin?s cost of equity? (Do not include the percent sign (%).) Cost of equity _____________ % (b) If the firm converts to 15 percent debt, what will its cost of equity be? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Cost of equity ____________ % (c) If the firm converts to 55 percent debt, what will its cost of equity be? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Cost of equity _____________ % (d) What is Malkin?s WACC in part (b) and (c)? (Do not include the percent signs (%). Round your answers to the nearest whole number (e.g., 32).) WACC 15 percent _________ % 55 percent _________ %

Explanation / Answer

WACC = Cost of Debt * Debt / (Debt + Equity) * (1- tax rate) + Cost of Equity * Equity / (Debt + Equity)

Debt / (Debt + Equity) = weight of debt, Wd

Equity / (Debt + Equity) = weight of equity, We

1. If firm has no debt, Wd = 0% and We = 100%

WACC = 11% = 0% * 6% + 100% * k(e)

Ke = 11%

2. Wd = 15%

11% = 0.15 * 6% + 0.85* k(e)

11% - 0.9% = 0.85* k(e)

k(e) = 11.88%

3.

Wd = 55%

11% = 0.55 * 6% + 0.45* k(e)

11% - 3.3% = 0.45* k(e)

k(e) = 17.11%

d. At 15%

WACC = 0.15 * 6% + 0.85* 11.88% =0.9% + 10.1% = 11%

At 55%

WACC = 0.55 * 6% + 0.45* 17.11% = 3.3% + 7.7% = 11%

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