With a tax rate of 35%, Big Oil had a WAAC of 10.5%. Suppose Big Oil is excused from paying taxes.

TABLE 13.3

Suppose Big Oil starts from the financing mix in Table 13.3, and then borrows an additional $200 million from the bank. It then pays out a special $200 million dividend, leaving its assets and operations unchanged. What happens to Big Oil's WACC, still assuming it pays no taxes? What happens to the cost of equity?

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quired Rate of Ret 990 Security Type Debt Common stocE Total Capital Structure 385.7 D/V 1,200.00 E/V 0.243rdebt 0.757 requity 12% VF 1,585.70 Common stock beta Risk-free interest rate Debt Value Common stock Debt interest rates Cost of equity Borrowed Special Dividend 0.85 6% 385.70 1,200.00 9% 12% 200.00 milion 200.00million