1. Whispering Pines, Inc., is currently all-equity-financed. The current expected rate of return on the company's shares is 9.50%. Suppose the company issues debt, repurchases shares, and moves to a 27.50% debt-to-value ratio (D/V = 0.2750). What will be the company's new after-tax weighted-average cost of capital at the new capital structure? Assume the new debt yields 5.00% and the tax rate is 34%.
a. 9.03% b. 11.21% c. 9.50% d. 14.50%
2. Johnston Company has a 7% cost of debt, a 50% debt-value (D/V) ratio, and a 15% cost of equity. The marginal tax rate is 25%. What would be Johnston's WACC if it were 100% equity financed? Assume continuous leverage rebalancing.
a. 10.13% b. 7.50% c. 15.00% d. 11.00%