Answer to Question #304310 in Management for Beast

Question

Empress Express has no debt but can borrow at 8.2 percent. The WACC for the

firm is currently at 11 percent, and the tax rate is 35 percent.

I.

What is the cost of equity for the firm?

II.

If the firm converts to 25 percent debt, determine the total cost of equity and

the WACC for the firm. 

Answer 1

Answer

I. cost of equity of the firm

$11/100+(25/100)/(1-25/100)*(11/100-8.2/100)*$

$(1-35/100)$

$11/100+0.33(028)(0.65)$

$=17.01/100$

II. WACC for the firm

$(75/100*17.01/100)+(25/100*8.2/100)*(1-35/100)$

$=0.127575+0.0205*0.65$

$0.127575+0.013325 =14.09/100$