You are reviewing the capital structure of your business. You find that your business is financed with 70% cash and 30% debt.
Your required rate of return for your business is 10%.
Your debt cost is 7%
You are in the 20% tax bracket.
Explain the weighted average cost of capital?
What if you used 80% debt and 20% cash? What would be your new WACC?
How would using more debt in this example affect your profitability as a business?