Question: QUESTION 7 a. Suppose Dell Inc is currently has a debt to equity ratio of 1:2. The cost of debt is 5%, the cost of

QUESTION 7

a. Suppose Dell Inc is currently has a debt to equity ratio of 1:2. The cost of debt is 5%, the cost of equity is 16%, and the tax rate is 20%. What is the WACC for Dell? (Hint: For D/E ratio of 1:2, you can assume MVD = 1 and MVE = 2 to do this calculation.)

12%

12.33%

16%

10.2%

b. Given Q7: If Dell had no debt and was 100% equity financed, what would the cost of equity (r_e)? (Answer in %. Ex for .6789 put 67.89%)

c. Given Q7: Next, suppose Dell wants to change its capital structure and move to a debt to equity ratio of 1:3. If the cost of debt remains the same, what is the new cost of equity for Dell? (Answer in %. Ex for .6789 put 67.89%)

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