Micron recently landed a large-scale contract to supply semiconductor chips to Apple for the next five years. Micron is going to pay a $2.50 dividend this year and dividends are expected to grow constantly at 5% growth rate forever. The current trading price of one share is $25. The firm has 100,000 shares outstanding. The firm also has long term debt with the bank with a market value of $2.5 million at the rate of 8%. The firm pays taxes at the rate of 35%.

a) What is the debt-to-equity ratio? 

 

b) Determine the WACC. 

 

c) The bank loan has a covenant that increases the rate of the debt to 10% if the debt-to-equity is above 0.8. Compute the new WACC assuming the cost of equity doesn't change.