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Problem #1 (5,marks) Green Island Construction has a cost of equity of 11% and a cost of debt of 7%. The current debt-equity ratio is
Problem #1 (5,marks) Green Island Construction has a cost of equity of 11% and a cost of debt of 7%. The current debt-equity ratio is 0.60. What will the cost of equity be if the target debt to equity ratio is increased to 2? Assume there is no tax and no cost of financial distress and general M&M assumptions apply. Problem #2 (5 marks) Mimosa Machinery Inc has total market value of $20 million and total debt of $7.5 million (market and book value of debt are equal). The yield-to-maturity on Mimosa's bonds is 6.5%. The cost of capital with no debt is 8.5%. The tax rate is 34%. If there are no costs of financial distress, what is the WACC? (General M&M assumptions apply)
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