Chandeliers Corp. has no debt but can borrow at 6.7 percent. The firm?s WACC is currently 8.5 percent, and the tax rate is 35 percent. a. What is the company?s cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % 8.5% b. If the firm converts to 20 percent debt, what will its cost of equity be? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % c. If the firm converts to 40 percent debt, what will its cost of equity be?(Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % d-1 If the firm converts to 20 percent debt, what is the company?s WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC % d-2 If the firm converts to 40 percent debt, what is the company?s WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC %
Chandeliers Corp. has no debt but can borrow at 6.7 percent. The firm's WACC is currently 8.5 percent, and the tax rate is 35 percent. a. What is the company's cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % 8.5% b. If the firm converts to 20 percent debt, what will its cost of equity be? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % c. If the firm converts to 40 percent debt, what will its cost of equity be?(Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % d-1 If the firm converts to 20 percent debt, what is the company's WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC % d-2 If the firm converts to 40 percent debt, what is the company's WACC?(Round your answer to 2 decimal places. (e.g., 32.16)) WACC % Hint(Example)Empress Corp. has no debt but can borrow at 8.2 percent. The firm's WACC is currently 11 percent, and the tax rate is 35%. What is the company's cost of equity? How will the firm's cost of equity change if the firm converts to 25 percent debt or 50 percent debt? What will happen to its WACC if it converts to 25 percent debt or 50 percent debt? Current capital structure Cost of borrowing Cost of Equity (RE) MM Proposition II No Debt 25% Debt 50% Debt 25% Debt 50% Debt _No Debt_ __8.2%___ WACC _11%_ Tax rate _35%_ RE = RU + (RU - RD) X D/E X (1 - TC ) _11.00% = _11%_ + (_11%_ - _8.2%) X _0.0%_ X (_0.65_) _11.61% = _11%_ + (_11%_ - _8.2%) X _33.33%_ X (_0.65_) _12.85% = _11%_ + (_11%_ - _8.2%) X _100%___X (_0.65_) WACC = WE X RE + WD X RD X (1 - T) _10.04% = _75%_ X _11.61% + _25% X _8.2%_ X (_0.65) _9.08%_ = _50%_ X _12.82% + _50% X _8.2%_ X (_0.65) Chandeliers Corp. has no debt but can borrow at 6.7 percent. The firm's WACC is currently 8.5 percent, and the tax rate is 35 percent. Current capital structure Cost of borrowing Cost of Equity (RE) MM Proposition II No Debt 20% Debt 40% Debt 20% Debt 40% Debt _No Debt ___6.2%_ WACC _8.5% Tax rate _35%_ RE = RU + (RU - RD) X D/E X (1 - TC) _8.5% = 8.5% + (8.5%_ - _6.7_) X _0.0% X (_0.65) _____ = 8.5%_ + (8.5%_ - _6.7_) X _____ X (_0.65) _____ = 8.5%_ + (8.5%_ - _6.7_) X _____ X (_0.65) WACC = WE X RE + WD X RD X (1 - T) _____ = _80%_ X _____ + _20%_ X __6.7_ X (_0.65) _____ = _60%_ X _____ + _80%_ X __6.7_ X (_0.65) a. What is the company's cost of equity? _8.5%_ b. If the firm converts to 20 percent debt, what will its cost of equity be? _____ c. If the firm converts to 40 percent debt, what will its cost of equity be? _____ d-1 If the firm converts to 20 percent debt, what is the company's WACC? _____ d-2 If the firm converts to 40 percent debt, what is the company's WACC? _____
