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(b) DSH Ltd. has a debt-equity ratio of 1. Its weighted average cost of capital is 11%, and its cost of debt is 9%. The

(b) DSH Ltd. has a debt-equity ratio of 1. Its weighted average cost of capital is 11%, and its cost of debt is 9%. The corporate tax is 35%.

(i)What is DSH's cost of equity?

(ii)What is KLD's unlevered cost of equity?

DSH is increasing the proportion of debt in the firm (at the same cost) so that the new debt-equity ratio is 1.5.

(iii)What is the new cost of equity?

(iv)What is the weighted average cost of capital?

(v)Explain why the cost of equity changes when the debt-equity ratio changes.

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