Problem:
Whispering Pines, Inc. is currently all-equity financed. The expected rate of return on its unlevered shares is 12%. The beta of the market portfolio is 1.0, the risk-free rate of return is 3%, and the market risk premium is 6%. Given this information, answer the questions below
Required:
Suppose the company issues debt, repurchases shares, and moves to a 30% debt-to-value ratio (D/V=.3). What will the company's new weighted-average cost of capital be at the new capital structure? The borrowing rate is 7.5% and the tax rate is 35%.
Note: Please show basic calculation