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As an analyst, you collect the following information of Luna Inc. Luna has 25,000 common stocks outstanding with equity beta of 1.25. The book value
As an analyst, you collect the following information of Luna Inc. Luna has 25,000 common stocks outstanding with equity beta of 1.25. The book value is $50 per share and market price is $65 per share. The market risk premium is 9% and the risk-free rate is 3.5%. Luna has two bond issues outstanding. The first bond has $850,000 par value, 7.5% coupon rate, 8 years to maturity, and is trading at 105 ( 105% of par). The second bond has $600,000 par value, 9% coupon rate, 12 years to maturity, and is trading at YTM of 8%. All bonds pay semi-annual coupons. The tax rate is 40%. a) Using market values of equity and debt, calculate Luna's WACC. b) Calculate the unlevered beta of Luna. c) Assume everything else remains unchanged, calculate the WACC if Luna changes its D/E to 0.8 and its cost of debt is reduced by 40 basis points ( 100 basis points =1% )
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