Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same capital structure with a debt-to-equity ratio of
Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same capital structure with a debt-to-equity ratio of 1/19. Recently, however, Dell hired many investment bankers and consultants at great expense, and decided to change its debt-to-equity ratio to 1/5. HP figures that they will copy Dell, and move their debt-to-cquity ratio to 1/5 as well HP doesn't want to pay for the bankers and consultants that Dell used. Thus, HP relies on you to help them understand the transition. Assume the ollowing: HP used to have a cost of cquity of 20%. Assume that regardless of its capital structure, HP's cost of debt is 3%. The change in DE is expected to be permanent. Further, HP's tax rate is 30%. [Step 1: de-levering] Find the cost of unlevered equity for HP. 0 A. 16.35% O B. 19.00% G. 19.15%, O D. 22.38% 13, [Step 2: Re-levering] Find the cost of levered equity for HP under the new capital structure (i.e. the debt-to- equity ratio of 1/5). A. 19.00% . 17.48% C. 19.1 5% O D. 22.38% 1 What is HP's new WACC? OA. 19.00% O B. 17.48% C. 19.15% O D. 22.38%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started