Can I get help on the below question? I’m not sure if I’m doing it right. Please provide equations so I can follow the logic.
Cars Corporation currently has 15% debt in its capital structure; however, its new CFO is considering changing the capital structure to 30% debt. The company has 4% annual coupon bonds outstanding that have a before-tax yield to maturity of 6%. Additional financial information is given below.
Risk-free rate, rRF 2.50% Tax rate, T 25%
Market risk premium (rM – rRF) 5.00% Current beta, bL 1.1
a. What is the company’s WACC at its existing 15% debt ratio?
b. What would be the company’s levered beta if it increased its debt ratio to 30%? Carry your answer out to 4 decimal places.