Question
Gaterode Inc. currently has zero debt (i.e., w d = 0). It is a zero growth company, and additional firm data are shown below. Now
Gaterode Inc. currently has zero debt (i.e., wd = 0). It is a zero growth company, and additional firm data are shown below. Now the company is considering using some debt, moving to the new capital structure indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
If this plan were carried out, by how much would the WACC change, i.e., what is WACCOld WACCNew? Show your calculations, if any, and explain your answer.
wd | 65% | Orig. cost of equity, rs | 10.0% |
wc | 35% | New cost of equity = rs | 11.5% |
Interest rate new = rd | 7.0% | Tax rate | 40% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started