Problem:
The Nantucket Nugget is unlevered and is valued at $720,000. Nantucket is currently deciding whether including debt in its capital structure would increase its value. The current cost of equity is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and their effective marginal tax bracket is zero.
Required:
Question 1: What is Nantucket's new cost of equity?
Question 2: What is Nantucket's new weighted average cost of capital (WACC)?
Note: Please show guided help with steps and answer.