Malkin Corp. has no debt but can borrow at 7.25 percent. The firm’s WACC is curr

Question

Malkin Corp. has no debt but can borrow at 7.25 percent. The firm’s WACC is currently 13 percent, and there is no corporate tax.

B.)If the firm converts to 25 percent debt, what will its cost of equity be?

C.)If the firm converts to 55 percent debt, what will its cost of equity be?

D.)What is Malkin’s WACC in part (b) and (c)?

B.)If the firm converts to 25 percent debt, what will its cost of equity be?

C.)If the firm converts to 55 percent debt, what will its cost of equity be?

D.)What is Malkin’s WACC in part (b) and (c)?

Explanation / Answer

WACC = Debt/ Total*Cost of debt+ Equity* cost of equity/ total 13 = .25*7.25/1+.75*x .75x = 11.1875 x= 11.1875/.75 X = 14.92% Cost of Equity is 14.92% WACC = Debt/ Total*Cost of debt+ Equity* cost of equity/ total 13 = .55*7.25/1+.45*x .45X = 13-3.9875 X = 9.0125/.45 X = 20.03% Cost of Equity will be 20.03%

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