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Question 1: The debt-to-equity ratio of your firm is currently 1/2. Under this capital structure,...

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Finance

Question 1: The debt-to-equity ratio of your firm is currently 1/2. Under this capital structure, the cost of equity is 12%. You are planning to change your firms capital structure so that the new debt-to-equity ratio becomes 2. The change in the debt-to-equity ratio is expected to be permanent. Assume that regardless of the firms capital structure, the cost of debt is 6% and the corporate tax rate is 40%. What is the WACC under the current capital structure?

A.

8.4%
B.

10%
C.

18%
D.

9.2%

QUESTION 2

What is the firms unlevered cost of capital?

A.

9.2%
B.

10%
C.

8.4%
D.

18%

QUESTION 3

What is the firms cost of equity under the new capital structure?

A.

18%
B.

9.2%
C.

8.4%
D.

10%

QUESTION 4

What is the WACC under the new capital structure?

A.

9.2%
B.

8.4%
C.

10%
D.

18%

QUESTION 5

The new WACC is _______ than the old WACC due to _______.

A.

lower; a higher tax benefit of debt
B.

higher; a lower tax benefit of debt
C.

higher; a higher tax benefit of debt
D.

lower; a lower tax benefit of debt

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