Problem $16-10$ Leverage and the Cost of Capital $($LO$1)$

"Increasing financial leverage increases both the cost of debt $(r_{\text{d}\text{e}\text{b}\text{t}})$ and the cost of equity $(r_{\text{e}\text{q}\text{u}\text{i}\text{t}\text{y}}).$ So the overall cost of capital

cannot stay constant." This problem is designed to show that the speaker is confused. Buggins Inc. is financed equally by debt and

equity, each with a market value of $$1$ million. The cost of debt is $9\%,$ and the cost of equity is $14\%.$ The company now makes a further

issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to $10\%$ and the cost of equity to rise to

$16\%.$ Assume the firm pays no taxes.

a$.$ After the debt issue, what percent of the firm is financed with debt? $($Do not round intermediate calculations. Enter your answer as

a whole percent.$)$

Percentage of debt

b$.$ After the debt issue, what percent of the firm is financed with equity? $($Do not round intermediate calculations. Enter your answer

as a whole percent.$)$

Percentage of equity

c$.$ What is the overall cost of capital? $($Enter your answer as a percent rounded to $1$ decimal place.$)$