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McCain Enterprises is thinking about changing its permanent capital structure from 40% debt to asset ratio to 50% debt ratio. The following...
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Question

1.    McCain Enterprises is thinking about changing its permanent

capital structure from 40% debt to asset ratio to 50% debt ratio. The following information is currently available:
Cost of debt (RRR of creditors) is 7%. Tax rate is 25%. Required return on equity (cost of equity) given the 25% tax rate is 18.70%. If taxes did not exist, the RRR on equity would have been 20%. If the company switches to 50 debt the cost of debt is estimated at 8%.

-Calculate the opportunity cost of capital (required return on assets, RA)
-Calculate the current WACC.
-Calculate the cost of equity after the switch to 50% debt.
-Calculate the WACC after the switch to 50% debt.

Step-by-step answer

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Subject: Business, Finance

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