Plymouth, Inc.

• wishes to change its present capital structure (D/E ratio) from (30%/70%) to (40%/60%).
• _L = 1.15 R_f = 3.0%, r_M = 10.50%, Tax rate = 25.0%,
• FCF₀ = $200, g_L=2.0%, Current Debt = $500, Current r_D = 6.50%,

1. What is their current business risk (_U)?

_U = _L [1 +(1 T) x (w_D w_S)]=

2. At the new capital structure (40%/60%), what will be their total risk (_L)?

_L = _U x [1 + (1 T) x (w_D w_S)] =

3. At the new capital structure (40%/60%), what will be their required return on stock (r_L)?

r_S= r_f + _L x (r_m - r_f) =

4. At the new capital structure (40%/60%), their new r_D= 7.0%. What will be their cost of capital (WACC)?

WACC = w_D x r_d x(1 T) + w_S x r_S =