Whispering Pines, Inc., is all-equity-financed. The expected rate of return on the companys shares is 12%. a.

Question:

Whispering Pines, Inc., is all-equity-financed. The expected rate of return on the company’s shares is 12%.

a. What is the opportunity cost of capital for an average-risk Whispering Pines investment?

b. Suppose the company issues debt, repurchases shares, and moves to a 30% debt-to value ratio (D/V = .30). What will the company’s weighted-average cost of capital be at the new capital structure? The borrowing rate is 7.5% and the tax rate is 35%.

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...