Shadow Corp. has no debt but can borrow at 6.2 percent. The firm’s WACC is currently...

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Finance

Shadow Corp. has no debt but can borrow at 6.2 percent. Thefirm’s WACC is currently 8.5 percent and the tax rate is 25percent.
a.
What is the company’s cost of equity? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
b. If the firm converts to 15 percent debt, what will its cost ofequity be? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)
c. If the firm converts to 40 percent debt, what will its cost ofequity be? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)
d-1. If the firm converts to 15 percent debt, what is the company’sWACC? (Do not round intermediate calculations and enteryour answer as a percent rounded to 2 decimal places, e.g.,32.16.)
d-2. If the firm converts to 40 percent debt, what is the company’sWACC? (Do not round intermediate calculations. Enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)

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4.0 Ratings (595 Votes)

a Cost of equity if company has no debt Company has capital 100 in equity only nil amount in debt So companys cost of equity will be equals to its wacc Here wacc 850 Hence Cost of equity 850 b Cost of equity if converts to 15 debt Weight of debt 15 or 015 Weight of equity 1 Debt 1 015 See Answer

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a.	What is the company’s cost of equity? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
b.	If the firm converts to 15 percent debt, what will its cost ofequity be? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)
c.	If the firm converts to 40 percent debt, what will its cost ofequity be? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)
d-1.	If the firm converts to 15 percent debt, what is the company’sWACC? (Do not round intermediate calculations and enteryour answer as a percent rounded to 2 decimal places, e.g.,32.16.)
d-2.	If the firm converts to 40 percent debt, what is the company’sWACC? (Do not round intermediate calculations. Enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)