In a perfect market, Amora Inc. does not have debt but is able to borrow at 8 percent. The firm’s WACC is currently at 11.5 percent.

1. What is Amora’s cost of equity? (2 marks)

2. What would Amora’s cost of equity be if the company decides to convert its capital structure to 35 percent debt? (6 marks)

3. What would Amora’s cost of equity be if the company decides to use 50 percent debt instead? (6 marks)

4. Assume now there are corporate taxes of 35 percent, what is the after-tax WACC for part (c). (6 marks)

5. Briefly comment on this after-tax WACC calculated in part (d) with unlevered cost of capital. (3 marks)