NatNah, a builder of acoustic accessories, has no debt and an equity cost of cap

Question

NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 14% Suppose NatNah decides to increase its leverage and maintain a market debt-to-value ratio of 0.50. Suppose its debt cost of capital is 7% and its corporate tax rate is 32% If NatNah's pretax WACC remains constant, what will its (effective after-tax) WACC be with the increase in leverage? (Hint: While the pretax WACC remains the same, the equity cost of capital increases when lower cost debt is added to the capital structure. However, you will not need to recalculate the equity cost of capital since the overall pretax WACC is assumed to remain constant even after the addition of debt.)

Explanation / Answer

If NatNah's pretax WACC remains constant, what will its (effective after-tax) WACC be with the increase in leverage

=14%-(0.50*7%*32%)

=12.88%

the above is answer..

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