Question 1: A publicly traded firm has no debt in its capital structure.The beta of its stock is 1.5. The firm's credit rating is such that it can borrow at a 6% interest rate by issuing 10-year bonds. The firm plans to change its capital structure by issuing bonds to maintain a long-term debt-to-equity ratio of 40%. Estimate the weighted average cost of capital with the new capital structure.

Assume the market risk premium is 5%, the 10-year Treasury bond yield is 4%, and the corporate income tax rate is 35%.

WACC with 0 Debt

WACC with 40%D/E ratio