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What is the firm WACC

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Question - Pettit Printing Company has a total market value of $96,352,593, consisting of 1,240,000 shares selling for $41.96 per share and $44,323,080 of 4% perpetual bonds now selling at par. The company's EBIT is $6,670,000 , and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 14%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 8% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 2% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence its stock is a zero-growth stock. Its current cost of equity, rs, is 8%. If it increases leverage, rs will be 14%. If it decreases leverage, rs will be 6%. What is the firm's WACC if it moves to the high leverage capital structure?

a. 10.1090%

b. 10.3808%

c. 8.9600%

d. 11.9267%

e. 7.4100%

Reference no: EM132790177

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