with details, please :)

Adjusted WACC Thorpe and Company is currently an all equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85 and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds are sold, the beta of the company will increase to 0.95. What was WACC of Thorpe and Company before the bond sale? What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is 40%? Hint: The weight of equity before selling the bond is 100% Adjusted WACC Before the sale of bonds the weighted average cost of capital is the cost of equity Re = 2.5% +0.85 (13.0% - 2.5%) = 11.425% WACC After the sale of bonds the new cost of equity is: Re = 2.5% +0.95 (13.0% - 2.5%) = 12.475% Cost of debt is from the yield-to-maturity of the bond Coupon = 0.10 * $1,000 / 2 = $50 (every six months) Price = $1,143.08 Par Value = $1,000 N = 20 * 2 = 40 8.5% If Bonds sell for $28 million can retire 1 million shares, $28,000,000 / $28 = 1,000,000 The market value of equity is now $28 * 2,000,000 = $56,000,000 The market value of debt is $28,000,000 EN = $56,000,000 / ($56,000,000+ $28,000,000) = 0.6667 DN = $28,000,000 / ($56,000,000 + $28,000,000) = 0.3333 Page 17 Adjusted WACC