Weston Industries has a debt–equity ratio of 1.4. Its WACC is 9.8 percent, and its cost of debt is 7.5 percent. The corporate tax rate is 35 percent.
| a. |
What is Weston’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Cost of equity capital | % |
| b. |
What is Weston’s unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Unlevered cost of equity capital | % |
| c-1 |
What would the cost of equity be if the debt-equity ratio were 2?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Cost of equity | % |
| c-2 |
What would the cost of equity be if the debt-equity ratio were 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Cost of equity | % |
| c-3 |
What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Cost of equity | % |
Weston also is financed entirely with equity. The company is considering a loan of $1.81 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 9 percent. The company’s tax rate is 40 percent.
According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
| Increase in company value | $ |
0 comments