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Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The

Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firms unlevered beta is 1.15, and its cost of equity is 11.05%. Because the firm has no debt in its capital structure, its weighted cost of capital (WACC) also equals 11.05%. The risk-free rate of interest (rf
) is 3%, and the market risk premium (rm
- rf
) is 7%. Green Gooses marginal tax rate is 40%.
Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted cost of capital (WACC). Complete the following table.
D/A Ratio
E/A Ratio
B/E Ratio
Bond Rating
Before-Tax Cost of Debt (kd
)
Levered Beta (\beta )
Cost of Equity (ke
)
WACC
0.01.00.001.1511.05%11.05%
0.20.80.25 A 8.1%1.3912.24%10.76%
0.40.60.67 BBB 8.5%1.6114.27%
0.60.41.50 BB 10.9%2.1811.23%
0.80.2

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