Adjusted

WACC.

Thorpe and Company is currently an all-equity firm. It has three million shares selling for

$44

per share. Its beta is

0.7,

and the current risk-free rate is

2.12.1%.

The expected return on the market for the coming year is

13.3%.

Thorpe will sell corporate bonds for

$44,000,000

and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a

8.1%

coupon rate and

$1,000

par value. The bonds are currently selling for

$971.17

per bond. When the bonds are sold, the beta of the company will increase to

1.1.

What was the WACC of Thorpe and Company before the bond sale? What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is

40%?

Hint:

The weight of equity before selling the bond is 100%.

What was the WACC of Thorpe and Company before the bond sale?

What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is

40%?