Use the following information for questions 8 to 11. Caracal Ltd. is comparing

different capital structures. The management of the company needs to compare

the WACC of the different financing options at its disposal. Specifically, there is a

need to compare the WACC's of the two options it is considering. The first option,

is to borrow funds while the second option is to raise equity. The company has a

target D/E ratio of 0.45 which it intends to revert to as soon as possible, while its

current D/E ratio is 0.50. Currently, the company has a beta of 1.5. The tax rate is

28%, the risk free rate 7% and the market risk premium, 6%. A very similar

company recently issued bonds with a YTM of 10%. The company has R15 000 in

total assets, R5000 in total liabilities with a book cost of 5% and has R10 000 in

equity. The company currently has EBIT of R1000 which it expects to stay the

same for the foreseeable future. R5000 will be raised, either by debt or equity. If

debt is raised, the company expects to issue bonds at a market related YTM with

a coupon rate of 10%.

Question 8) If the company chose to use debt financing,

what would it's WACC be?

A. 10.00%

B. 13.33%

C. 18.34%

D. 45.00%

Question 9) If debt is raised, the company expects to issue bonds at a market related YTM with

a coupon rate of 10%. What would its WACC under the equity option be?

A. 10.00%

B. 10.33%

C. 11.57%

D. 15.15%

Question 10) What would the return on equity be if the debt

option was chosen?

A. 1.00%

B. 1.80%

C. 2.50%

D. 25.20%

Question 11) What would the return on equity be if the

equity option was chosen?

A. 1.80%

B. 2.50%

C. 3.60%

D. 7.20%