Does any have any advice on how to answer the following questions? Whispering Pi

Question

Does any have any advice on how to answer the following questions?

Whispering Pines, Inc. is currently all-equity financed. The expected rate of return on its unlevered shares is 12%. The beta of the market portfolio is 1.0, the risk-free rate of return is 3%, and the market risk premium is 6%. Given this information, answer the questions below.
What is the opportunity cost of capital for an average-risk Whispering Pines investment?
Are the assets of Whispering Pines more, less, or as risky as the market to a diversified investor? Briefly justify your response.
Suppose the company issues debt, repurchases shares, and moves to a 30% debt-to-value ratio (D/V=.3). What will the company’s new weighted-average cost of capital be at the new capital structure? The borrowing rate is 7.5% and the tax rate is 35%.

Explanation / Answer

What is the opportunity cost of capital for an average-risk Whispering Pines investment?

Opportunity cost of capital for an average-risk = 12%

Are the assets of Whispering Pines more, less, or as risky as the market to a diversified investor? Briefly justify your response.

Expected Return on Market portfolio = risk-free rate of return + market risk premium

Expected Return on Market portfolio = 3 + 6*1

Expected Return on Market portfolio = 9%

Assets of Whispering Pines more, risky as the market to a diversified investor , since it cost of capital is greater than Expected Return on Market portfolio

Suppose the company issues debt, repurchases shares, and moves to a 30% debt-to-value ratio (D/V=.3). What will the company’s new weighted-average cost of capital be at the new capital structure? The borrowing rate is 7.5% and the tax rate is 35%

Levered

Cost of Equity = Unlevered Cost of Equity + D/E * ( Unlevered Cost of Equity - Cost of Debt)*(1-tax rate)

Cost of Equity = 12% + 0.3/0.70 *(12% - 7.5%)*(1-35%)

Cost of Equity = 13.25%

Company’s new weighted-average cost of capital = Weight of Equity*Cost of Equity + Weight of Debt*Cost of after tax debt

Company’s new weighted-average cost of capital = 70%*13.25 + 30%*7.5*(1-35%)

Company’s new weighted-average cost of capital = 10.74%

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