PLEASE HELP!!! 7 PEOPLE HAVE ANSWERED AND BEEN WRONG. I\'M REALLY STRUGGLING WIT

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PLEASE HELP!!! 7 PEOPLE HAVE ANSWERED AND BEEN WRONG. I'M REALLY STRUGGLING WITH THIS PROBLEM.

Shadow Corp. has no debt but can borrow at 6.7 percent. The firm’s WACC is currently 8.5 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 20 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 20 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).)

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).)

Explanation / Answer

a. If the debt proportion in the total capital is nil ,then the cost of capital is equal to wacc only. Therefore the cost of capital is 8.5% in the first case.

b. If the debt proportion in the total capital turns out to be 20% then cost of capital would be

WdKd + WeKe = WACC

0.2*6.7*(1-0.35) + 0.8* Ke = 8.5

ke = 9.53%

c. If the debt proportion turns out to be 40% then the cost of capital would be

Wdkd +WeKe =WACC

0.4*6.7*(1- 0.35) + 0.6 Ke = 8.5

Ke = 11.26%

D.1 - To find out the WACC we require cost of capital and cost of debt. However in the given question cost of debt was given but cost of capital was not given exactly. Hence we need to take the average of above cost of capitals which we got earlier Or we can assume it as 10%

Average cost of capital = 8.5+9.53+11.26/3

= 9.76

Now , WACC = 0.2*6.7*(1-0.35) + 0.8*9.76 = 8.679

D.2- WACC = 0.4*6.7*(1-0.35) + 0.6*9.76 = 7.598

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