Currently, Double J Inc. has a capital structure of 40% debt and 60% common stock. The companys levered cost of equity is 10.00% and its cost of debt (pre-tax) is 3.75%. Double Js companys tax rate is 20%.

Calculate the weighted average cost of capital (WACC) of Double J given the capital structure stated above. (5 points)

ANSWER TO Question 3a:

WACC = ______________%

Suppose that the beta of Double Js assets (i.e., its unlevered beta) is exactly 1.00. Calculate Double Js levered beta given the capital structure stated above. (5 points)

ANSWER TO Question 3b:

Levered beta = ________

Continue with the assumption that Double Js unlevered beta is exactly 1.00. Also assume that the expected market return is 7.39% and the risk-free rate is 2.50%. Calculate Double Js weighted average cost of capital (WACC) if the company changed to an all-equity company. In other words, what is Double Js unlevered cost of equity? (5 points)

ANSWER TO Question 3c:

WACC (i.e., unlevered cost of equity) = __________%

d. You should find that your answer to question c is higher than your answer to question a. Please describe briefly the company value implications for Double J associated with changing from a levered company to an unlevered company.