Problem:
A company is trying to decide whether to revise its target capital structure. Currently, it targets 50% debt and 50% equity. However, it is considering changing the mix to 70% debt and 30% equity. Their debt currently has an after-tax cost of 6% and the equity costs them 12%. They do not have any preferred stock.
Required:
Question 1: What is their current WACC?
Question 2: Assuming that the cost of debt and equity remain unchanged, what will be their WACC if they incerase debt to 70% as proposed?
Note: Please show how you came up with the solution.