Shadow Corp. has no debt but can borrow at 6.2 percent. The firm’s WACC is curre

Question

Shadow Corp. has no debt but can borrow at 6.2 percent. The firm’s WACC is currently 8.0 percent, and the tax rate is 35 percent.

What is Shadow’s cost of equity? (Do not round intermediate calculations.)

If the firm converts to 20 percent debt, what will its cost of equity be? (Do not round intermediate calculations and round your final answer 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 and round your final answer 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 and round your final answer to 2 decimal places. (e.g., 32.16))

If the firm converts to 50 percent debt, what will the company's WACC be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Shadow Corp. has no debt but can borrow at 6.2 percent. The firm’s WACC is currently 8.0 percent, and the tax rate is 35 percent.

Explanation / Answer

a. WACC = Kd + Ke

8% = 0 + Ke (Kd will be zero because there is no debt)

Ke = 8%

b. If 20% debt

Borrow rate is 6.2%, Kd = 6.2 * .65 = 4.03%

WACC = 8%

Now. 8% = Ke + 4.03% *.2

Ke = 7.19%

c. If 50% Debt,

Ke = 8 - 4.03 *.5 = 5.99%

d. If 20% Debt, WACC = 7.19 + .806 = 8 %

d2. If 50% debt,

WACC = 5.99 + 4.03*.2 = 8%

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