Wacky Tobacco, Inc. (WTI) is a publicly traded corporation headquartered in California. WTI's CFO is calculating its weighted average cost of capital (WACC). WTI has obtained capital by selling stock and issuing bonds. The lenders who bought WTI's bonds expect a return of 6 percent. WTI's stockholders expect a return of 12 percent on their investment. The value of the firm is $500 million, consisting of $200 million in bonds and $300 million in stock. WTI's tax rate is 30 percent.

1. Calculate WTI's WACC.

1. Calculate WTI's after-tax cost of debt

1. Assume WTI sells another $100 million in bonds. Recalculate WTI's WACC, assuming all other values for this question remain the same except the value of the firm, which now equals $600 million.

Based on a through c above, explain the relationship between increased leverage and enterprise risk management. In your answer, it may be helpful to use the example of an airline like Southwest Airlines

Answer rating: 100% (QA)

To calculate Wacky Tobacco Incs WTI weighted average cost of capital WACC and aftertax cost of debt we can follow these steps Step 1 Calculate the wei... View the full answer