Taxes and the Cost of Capital. Here is Icknield's market$-$value balance sheet $($figures in

$ millions$)$:

The debt is yielding $7\%,$ and the cost of equity is $14\%.$ The tax rate is $21\%.$ Investors expect

this level of debt to be permanent. $($LO$16-2)$

a$.$ What is Icknield's WACC?

b$.$ How would the market$-$value balance sheet change if Icknield retired all its debt?

Hit: If the firm retires all its debt, the firm becomes an all$-$equity firm. The firm's value will be reduced because

of losing the tax shield. What is the new market value of the firm then? We assume that this process does not

change the net working capital but the long$-$term assets.