Malkin Corp. has no debt but can borrow at 8.75 percent. The firm’s WACC is curr

Question

Malkin Corp. has no debt but can borrow at 8.75 percent. The firm’s WACC is currently 16 percent, and there is no corporate tax.

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 percentage rounded to 2 decimal places (e.g., 32.16).)

If the firm converts to 50 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).)

What is Malkin’s 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).)

Malkin Corp. has no debt but can borrow at 8.75 percent. The firm’s WACC is currently 16 percent, and there is no corporate tax.

Explanation / Answer

1) since firm has no debt cost of equity = WACC = 16%

2) Cost of levered equity = cost of unlevered equity + D/E*(cost of unlevered equity -cost of debt)

= 16+.15/(1-.15)*(16-8.75) = 17.28%

3)

2) Cost of levered equity = cost of unlevered equity + D/E*(cost of unlevered equity -cost of debt)

= 16+.5/(1-.5)*(16-8.75) =23.25%

2) WACC = weight of debt * cost of debt + weight of equity *cost of equity

= 0.15*8.75+(1-.15)*17.28 = 16%

3)

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

= 0.5*8.75+(1-.5)*23.25 = 16%

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