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What is firm b wacc under its current leverage ratio

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Firm B's debt is long-term and risk-free. The long-term risk-free rate is 2%, Firm B's equity beta at its current leverage ratio (D/(D+E)) of 40% is 1.1, and the market risk premium is 6%. The marginal corporate tax rate is 15%.

(a) What is Firm B's WACC under its current leverage ratio (D/(D+E)) of 40%? Show your calculations.

(b) Now suppose that Firm B wants to reduce its leverage ratio (D/(D+E)) to 20%. Assume that Firm B's level of debt remains constant after the change in capital structure and its debt remains risk-free. What is its WACC at the 20% leverage ratio (D/(D+E))?

Reference no: EM132614258

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