Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

A. 8.85%

B. 12.56%

C. 13.01%

D. 9.94%

Question 1: Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonks cost of equity capital:

D. 8.28% 2.3% + 5.3% X 1.13

Question 2: Determine the weight on debt capital that should be used to calculate Zonks weighted-average cost of capital:

B. 21% 3,652 / 3652+13685; 3,652/17,337; .210648 = 21%

Question 3: Determine the weight on equity capital that should be used to calculate Zonks weighted-average cost of capital:

A. 79% 1.00 0.21 = 79%

Question 4: Using the above information, calculate Zonks weighted-average cost of capital:

B. 7.97% .79 X .083 + .21 X .068

Question 5: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

A. 4.35 [1+(1-0.35)] X .70 / .30 X 1.13; = 1.65 X 2.33333333 X 1.13; = 4.3505

Zonk Corporation Data

Total assets	$7,460
Interest-bearing debt	$3,652
Average pretax borrowing cost	10.5%
Common equity:
Book value	$2,950
Market value	$13,685
Income tax rate	35%
Market equity beta	1.13