Malkin Corp. has no debt but can borrow at 8 percent. The firm’s WACC is current
ID: 2788681 • Letter: M
Question
Malkin Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 16 percent, and there is no corporate tax. a. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.) Cost of equity % b. If the firm converts to 10 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % c. If the firm converts to 60 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % d. What is the company’s WACC in parts (b) and (c)? (Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.) WACC 10 percent % 60 percent %
Explanation / Answer
A
weight
cost of capital
cost of source = weight*cost of capital
debt
0
8
0
equity
1
15
15
total
1
cost of equity = weight of equity*cost of equity
15
B
weight
cost of capital
cost of source = weight*cost of capital
debt
0.1
8
0.8
equity
0.9
15
13.5
total
1
cost of equity = weight of equity*cost of equity
13.5
c
weight
cost of capital
cost of source = weight*cost of capital
debt
0.6
8
4.8
equity
0.4
15
6
total
1
cost of equity = weight of equity*cost of equity
6
D WACC at 10% debt
weight
cost of capital
cost of source = weight*cost of capital
debt
0.1
8
0.8
equity
0.9
15
13.5
total
1
WACC = sum of cost of source*weight
13.5
D WACC at 60% debt
weight
cost of capital
cost of source = weight*cost of capital
debt
0.6
8
4.8
equity
0.4
15
6
total
1
WACC = sum of cost of source*weight
10.8
A
weight
cost of capital
cost of source = weight*cost of capital
debt
0
8
0
equity
1
15
15
total
1
cost of equity = weight of equity*cost of equity
15
B
weight
cost of capital
cost of source = weight*cost of capital
debt
0.1
8
0.8
equity
0.9
15
13.5
total
1
cost of equity = weight of equity*cost of equity
13.5
c
weight
cost of capital
cost of source = weight*cost of capital
debt
0.6
8
4.8
equity
0.4
15
6
total
1
cost of equity = weight of equity*cost of equity
6
D WACC at 10% debt
weight
cost of capital
cost of source = weight*cost of capital
debt
0.1
8
0.8
equity
0.9
15
13.5
total
1
WACC = sum of cost of source*weight
13.5
D WACC at 60% debt
weight
cost of capital
cost of source = weight*cost of capital
debt
0.6
8
4.8
equity
0.4
15
6
total
1
WACC = sum of cost of source*weight
10.8
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