Malkin Corp has no debt but can borrow at 825 percent The fi

Malkin Corp. has no debt but can borrow at 8.25 percent. The firm

Solution

WACC = weight of debt * after tax cost of debt + weight of equity * cost of equity

a)

since there is not WACC is equal to cost of equity

=> cost of equity = 15%

b)

firm converts to 20% debt

weight of debt = 20%

weight of equity = 80%

cost of debt = 8.25%

WACC = 15%

=> 15% = 20% * 8.25% + 80% * cost of equity

cost of equity = 16.69%

c)

firm converts to 55% debt

weight of debt = 55%

weight of equity = 45%

cost of debt = 8.25%

WACC = 15%

=> 15% = 55% * 8.25% + 45% * cost of equity

cost of equity = 23.25%

d)

WACC does not change

at 20% WACC = 15%

at 55% WACC = 15%