Question: I have a question on Capital Structure, please help me on the following: Shadow Corp. has no debt but can borrow at 7%. The firms

I have a question on Capital Structure, please help me on the following:

Shadow Corp. has no debt but can borrow at 7%. The firms WACC is currently 11%, and the tax rate is 35%.

  1. What is Shadows cost of equity?
  2. If the firm converts to a 25% debt-to-equity ratio, what will its cost of equity be?
  3. What is Shadows WACC after it converts to the 25% debt-to-equity ratio?
  4. Assume that converting to the 25% debt-to-equity ratio does not significantly increase Shadow Corp.s probability of bankruptcy. Should Shadow Corp. convert to the new capital structure? Explain.

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