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Question: Braxton Corp. has no debt but can borrow at 8.1 percent. The firm’s WACC is currently 9.9 percent...

Braxton Corp. has no debt but can borrow at 8.1 percent. The firm’s WACC is currently 9.9 percent, and the tax rate is 35 percent. a. 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.) Cost of equity 9.9 % b. If the firm converts to 25 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.) Cost of equity 7.43 % c. If the firm converts to 50 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.) Cost of equity 4.95 % d-1 If the firm converts to 25 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.) WACC % d-2 If the firm converts to 50 percent debt, what is the company’s WACC?

Answer 1

Answer a.

WACC, R0 = 9.9%

Cost of Equity, RS = 9.9%

Answer b.

WACC, R0 = 9.90%
Cost of Debt, RB = 8.10%
tax rate, tC = 35%
Weight of Debt, B = 25%
Weight of Equity, S = 75%

Cost of Equity, RS = R0 + (R0 - RB)*(B/S)*(1-tC)
Cost of Equity, RS = 9.90% + (9.90% - 8.10%)*(25%/75%)*(1-0.35)
Cost of Equity, RS = 10.29%

Answer c.

WACC, R0 = 9.90%
Cost of Debt, RB = 8.10%
tax rate, tC = 35%
Weight of Debt, B = 50%
Weight of Equity, S = 50%

Cost of Equity, RS = R0 + (R0 - RB)*(B/S)*(1-tC)
Cost of Equity, RS = 9.90% + (9.90% - 8.10%)*(50%/50%)*(1-0.35)
Cost of Equity, RS = 11.07%

Answer d-1.

Cost of Equity, RS = 10.29%
Cost of Debt, RB = 8.10%
tax rate, tC = 35%
Weight of Debt, B = 25%
Weight of Equity, S = 75%

WACC, R0 = (S/V)*RS + (B/V)*RB*(1-tC)
WACC, R0 = 0.75*10.29% + 0.25*8.10%*(1-0.35)
WACC, R0 = 9.03%

Answer d-2.

Cost of Equity, RS = 11.07%
Cost of Debt, RB = 8.10%
tax rate, tC = 35%
Weight of Debt, B = 50%
Weight of Equity, S = 50%

WACC, R0 = (S/V)*RS + (B/V)*RB*(1-tC)
WACC, R0 = 0.50*11.07% + 0.50*8.10%*(1-0.35)
WACC, R0 = 8.17%