One of your new employees notes that your debt has a lower cost of capital (6%)...

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One of your new employees notes that your debt has a lower cost of capital (6%) than your equity (15%). So, he suggests that the firm swap its capital structure from 32% debt and 68% equity to 68% debt and 32% equity instead. He estimates that after the swap, your cost of equity would be 21%. a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC. b. Have you lowered your overall cost of capital? One of your new employees notes that your debt has a lower cost of capital (6%) than your equity (15%). So, he suggests that the firm swap its capital structure from 32% debt and 68% equity to 68% debt and 32% equity instead. He estimates that after the swap, your cost of equity would be 21%. a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC. b. Have you lowered your overall cost of capital?

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a To calculate the new cost of debt we first need to calculate the firms weighted average cost of c... View the full answer