One of your new employees notes that your debt has a lower cost of capital (6%)...

 

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One of your new employees notes that your debt has a lower cost of capital (6%) than your equity (14%). So, he suggests that the firm swap its capital structure from 34% debt and 66% equity to 66% debt and 34% equity instead. He estimates that after the swap, your cost of equity would be 21%. a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC. b. Have you lowered your overall cost of capital? One of your new employees notes that your debt has a lower cost of capital (6%) than your equity (14%). So, he suggests that the firm swap its capital structure from 34% debt and 66% equity to 66% debt and 34% equity instead. He estimates that after the swap, your cost of equity would be 21%. a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC. b. Have you lowered your overall cost of capital?