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Knick Inc. has two bonds outstanding, and both pay semi - annual coupons. The first bond has 1 8 years to maturity, 1 6 %

Knick Inc. has two bonds outstanding, and both pay semi-annual coupons. The first bond has 18 years to
maturity, 16% coupon rate, and $720,000 face value. It is trading at 110(110% of face value). The
second bond has 10 years to maturity, 8% coupon rate, and $880,000 face value. It is trading at 13.5%
YTM.
Knick has 150,000 shares outstanding with beta of 1.25. The expected dividend per share is $4 next year
and will grow at 2% per year. The market return is 15% and the risk-free rate is 3%. Corporate tax is 25%.
a) Calculate the cost of equity and the equity value.
b) Calculate the after-tax cost of debt.
c) Calculate the WACC.
d) Estimate the unlevered beta.
e) Assume that Knick changes its debt-to-equity ratio to 0.2 and its cost of debt decreases 40 bps,
estimate its new cost of equity and WACC.

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