Question: Shadow Corp. has no debt but can borrow at 8 percent. The firms WACC is currently 11 percent, and the tax rate is 35 percent.

Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent.

a. What is Shadow’s cost of equity?

b. If the firm converts to 25 percent debt, what will its cost of equity be?

c. If the firm converts to 50 percent debt, what will its cost of equity be?

d. What is Shadow’s WACC in part (b)? In part (c)?

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