ABC is now considering changing the debt ratio and moving it to the new debt/assets ratio as indicated below, and replacing all preferred stocks with debt. The money raised would be used to repurchase preferred stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out,

1. By how much would the WACC change, i.e., what is WACC_Old - WACC_New (WACC (in question (1) or (2)) WACC (in question (3))?

New Debt/Assets 55% Interest rate new = r_d 6.0%

New Equity/Assets 45% New cost of equity = r_s 15.0%

2. Based on the Hamada equation, what would the firm's beta be if it used no debt, i.e., what is its unlevered beta?

Answers for questions 1 and 2 below.

1.

I = [PV = -1,065, FV = 1,000, PMT = 40, N = 30]

I = 7.28%

Cost of Preferred Stock = 7.50/(95.50(1 - 0.03))

Cost of Preferred Stock = 8.10%

Calculating Cost of Equity using CAPM Model,

Cost of Equity = 0.06 + 1.15(0.07) = 14.05%

WACC = 0.40(0.0728)(1 - 0.40) + 0.15(0.081) + 0.45(0.1405)

WACC = 9.28%

IRR	21.97% Rounded 22%
		NPV=$374.22
		WACC=9.28%
MIRR Rounded =16% or 15.87%