A firm shares the following information with you:

EBIT = $45 million; Tax rate = 35%; Debt = $ 100 million; Cost of debt = 7 %; Unlevered cost of capital = 14%

The firm's creditors indicate that if the firm's debt reaches 50% of its total capital value, they would increase the interest rate on future financing to 9 %. Realizing an increase in the firm's borrowing cost; shareholders will also revise their required return to 15%.

i) What is the current % of debt used by the firm?

ii) Compute the current WACC. How will it change, once the percentage of debt reaches 50%? Should the firm borrow to increase its debt proportion in its capital structure?

Answer rating: 100% (QA)

i To find the current percentage of debt used by the firm we can use the debttocapital ratio formula ... View the full answer