1. Currently, Moringa INC. has a capital structure consisting of 20% debt and 80% equity. Moringas debt currently

has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the

CAPM, Moringa estimates that its cost of equity is currently 12.0%. The company has a 40% tax rate.

a) What is Moringas current WACC?

b) What is the current beta on Moringas common stock?

c) What would Moringas beta be if the company had no debt in its capital structure? (That is, what is Blooms

unlevered beta, bU?)

Moringas financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company

went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9.5%. The proposed

change will have no effect on the companys tax rate.

d) What would be the companys new cost of equity if it adopted the proposed change in capital structure?

e) What would be the companys new WACC if it adopted the proposed change in capital structure?

f) Based on your answer to Part e, would you advise Moringa to adopt the proposed change in capital structure?

Explain.