Braxton Corp. has no debt but can borrow at 6.5 percent. The firm’s WACC is curr

Question

Braxton Corp. has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 8.3 percent, and the tax rate is 35 percent.

What is the company’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 15 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 15 percent debt, what is the company’s WACC? (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 is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Braxton Corp. has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 8.3 percent, and the tax rate is 35 percent.

Explanation / Answer

(a) What is the company’s cost of equity? In case of NO debt , Only Equity owned company , Cost of Equity is equal to WACC Cost of Equity =8.3% (b) If the firm converts to 15 percent debt, what will its cost of equity be? R0=8.3%, Rate of debt =6.5% R ate of equity = R0 + ( R0 – Rate of debt )( debt / Equity )(1 – Tax rate) R (S) = 0.083 + (0.083 – 0.065)(0.15 / 0.85)(1 – 0.35)=0.0851 =8.51% (C ) If the firm converts to 40 percent debt, what will its cost of equity be? R ate of equity = R0 + ( R0 – Rate of debt )( debt / Equity )(1 – Tax rate) R (S) = 0.083 + (0.083 – 0.065)(0.40 / 0.60)(1 – 0.35)=0.0908 =9.08% (D -1) If the firm converts to 15 percent debt, what is the company’s WACC? WACC =(Weight of Equity * rate of equity) + (weight of debt *rate of debt ) (1 – Tax rate) Weight of Equity =0.85 Weight of debt =0.15 rate of Equity =8.51% Rate of debt =6.5% WACC =(0.85*8.51%) +(0.15*6.50%)(1-0.35) WACC =7.23%+0.63% =7.86% (D -2) If the firm converts to 40 percent debt, what is the company’s WACC? WACC =(Weight of Equity * rate of equity) + (weight of debt *rate of debt ) (1 – Tax rate) Weight of Equity =0.60 Weight of debt =0.40 rate of Equity =8.51% Rate of debt =6.5% WACC =(0.60*8.51%) +(0.40*6.50%)(1-0.35) WACC =5.10%+1.69% =6.79%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.