Question: (Leverage, WACC, and the required return on equity) Dicks Pet-Way Corporation (DPC) is a chain of pet stores that has an expected cash inflow of

(Leverage, WACC, and the required return on equity) Dicks Pet-Way Corporation (DPC) is a chain of pet stores that has an expected cash inflow of $2,160 each year forever. DPCs (after-tax) required return is 18% per year. All cash flow streams in this problem are perpe- tuities, and all of DPCs income is paid out to the firms investors.

a. If DPCs corporate tax rate is 35%, it is all-equity financed and there are no personal taxes, what is DPC worth (after taxes) in an otherwise-perfect capital market?

b. Suppose DPC borrows $4,000 at a debt rate of 12%. What will DPC be worth in an otherwise perfect capital market?

c. What will DPCs WACC be after it borrows the $4,000 (in part b)?

d. What will be the required return on DPCs equity after it borrows the $4,000?

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