Malkin Corp. has no debt but can borrow at 6.75 percent. The firm’s WACC is curr

Question

Malkin Corp. has no debt but can borrow at 6.75 percent. The firm’s WACC is currently 12 percent, and there is no corporate tax.

If the firm converts to 10 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 6.75 percent. The firm’s WACC is currently 12 percent, and there is no corporate tax.

Explanation / Answer

a. WACC = Debt/ total* cost of debt+ Equity/ Total* Cost of Equity WACC = 100/100*cost of Equity When there is no debt cost of equity is equal to WACC Cost of equity = 12% b. 12 = 10*6.75/100+90*x/100 Cost of Equity = 11.325*100/90 Cost of Equity = 12.58% c. Debt = 50% 12 = 50*6.75/100+50*x/100 Cost of Equity = 8.625*100/90 Cost of Equity = 17.25%

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