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