Question
Question 1 : The debt-to-equity ratio of your firm is currently 1/2. Under this capital structure, the cost of equity is 12%. You are planning
Question 1: The debt-to-equity ratio of your firm is currently 1/2. Under this capital structure, the cost of equity is 12%. You are planning to change your firms capital structure so that the new debt-to-equity ratio becomes 2. The change in the debt-to-equity ratio is expected to be permanent. Assume that regardless of the firms capital structure, the cost of debt is 6% and the corporate tax rate is 40%. What is the WACC under the current capital structure?
A. | 8.4% | |
B. | 10% | |
C. | 18% | |
D. | 9.2% |
QUESTION 2
What is the firms unlevered cost of capital?
A. | 9.2% | |
B. | 10% | |
C. | 8.4% | |
D. | 18% |
QUESTION 3
What is the firms cost of equity under the new capital structure?
A. | 18% | |
B. | 9.2% | |
C. | 8.4% | |
D. | 10% |
QUESTION 4
What is the WACC under the new capital structure?
A. | 9.2% | |
B. | 8.4% | |
C. | 10% | |
D. | 18% |
QUESTION 5
The new WACC is _______ than the old WACC due to _______.
A. | lower; a higher tax benefit of debt | |
B. | higher; a lower tax benefit of debt | |
C. | higher; a higher tax benefit of debt | |
D. | lower; a lower tax benefit of debt |
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