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XYZ company has a market debt to equity ratio of 1.6. Assume its current debt cost of capital is 5%, and its equity cost of capital is 14%. Assume that capital markets are perfect.
1) What is the WACC of XYZ company?
2) If XYZ issues equity and uses the proceeds to repay its debt and reduce its debt to equity ratio to 0.7, it will lower its debt cost of capital to 5.5%. With perfect capital markets, what effect will this transaction have on XYZ's equity cost of capital and WACC?
3) Suppose XYZ issues even more equity and pays off its debt completely. With perfect capital markets what will be the company's WACC and equity cost of capital after debt is paid off?
4) Suppose XYZ has an equity beta of 0.9 and a debt-to-equity ratio of 0.2. What is the asset beta for XYZ assuming its debt beta is zero?
5) Suppose XYZ increased its leverage so that its debt-to-equity ratio is 0.6. Assuming its debt beta is still zero, what would you expect its equity beta to be after the increase in leverage?
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