Capital Structure Problem Cerberus Holdings currently has $6.5 million in debt and $9.0 million in equity. Cerberus' beta is 1.27, their weighted average cost of capital is 7.75%, and their statutory tax rate is 34.5%. The risk-free rate is 1.875% and the expected return on the market is 8.15%. The company is weighing the decision to issue $1.6 million in new debt and using half of the proceeds to repurchase stock. With the new issue, management expects the cost of debt to be 7.75%. The remaining funds will be invested in a new plant in a different state. As a result of the new plant, Cerberus anticipates its statutory tax rate will increase to 38%. What is Cerberus' cost of debt as of today? What will the WACC be under the proposed capital structure and new tax rate?

Answer rating: 100% (QA)

To calculate Cerberus cost of debt as of today we can use the formula Cost of Debt RiskFree Rate Bet... View the full answer