You expect your firm to be worth $50, $100, or $120 with probabilities 1/10, 6/10 and 3/10, respectively. You can raise $75 in debt proceeds today if you promise an interest rate of 10%. If this is how you finance your firm, then your cost of equity capital is 20%
What is the value of your firm
What is your firm’s WACC?
If you raise $50 in debt proceeds today, your friendly investment banker tells you that you can get away promising an interest rate of 3%. What is your debt cost of capital in this case?
How much would then be financed through equity (in the $50-debt financing scenario)?