Suppose that a TV manufacturing company is currently financed with 20% debt and 80% equity (at market values). The required return on equity is 15%, and the required return on debt is 5%.
For all parts of this question, assume that the Modigliani-Miller theorem holds (i.e., there are no frictions such as taxes, costs of financial distress, asymmetric information, etc.).
Find the WACC given the above information.
Then find the WACC assuming that the capital structure changed to 40% debt and 60% equity and the cost of debt rose from 5% to 6%.
What is the company's weighted-average cost of capital after the debt issuance, given that the cost of debt has risen to 6%? What is the required return on the company's equity?
Please show all work.