What is shadow cost of equity

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Reference no: EM132000488

Shadow Corp. has no debt but can borrow at 7%. The firm’s WACC is currently 11%, and the tax rate is 35%.

a. What is Shadow’s cost of equity?

b. If the firm converts to a 25% debt-to-equity ratio, what will its cost of equity be?

c. What is Shadow’s WACC after it converts to the 25% debt-to-equity ratio?

d. Assume that converting to the 25% debt-to-equity ratio does not significantly increase Shadow Corp.’s probability of bankruptcy. Should Shadow Corp. convert to the new capital structure? Explain.

Reference no: EM132000488

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