Shadow Corp. has no debt but can borrow at 6.6 percent. The firm’s WACC is curre

Question

Shadow Corp. has no debt but can borrow at 6.6 percent. The firm’s WACC is currently 8.4 percent, and the tax rate is 35 percent.

What is Shadow’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 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).)

If the firm converts to 25 percent debt, what will the company's WACC 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 40 percent debt, what will the company's WACC be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Shadow Corp. has no debt but can borrow at 6.6 percent. The firm’s WACC is currently 8.4 percent, and the tax rate is 35 percent.

Explanation / Answer

a) Since firm has no debt WACc is cost of equity Cost of equity = 8.4% b) Cost of debt = 6.6%(1-.35) = 4.29 Statement showing computationof WACC Particulars Cost of Capital Weight Weighted Cost of capital Equity 8.40% 0.7500 6.30% Debt 4.29% 0.2500 1.07% 1.0000 7.37% Statement showing computationof WACC Particulars Cost of Capital Weight Weighted Cost of capital Equity 8.40% 0.6000 5.04% Debt 4.29% 0.4000 1.72% 1.0000 6.76%

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