Robins Doughnuts Limited currently has no debt. If they choose to borrow, they can do so at a rate of 6.4%. The firm's WACC is currently 9.5% and the tax rate is 35%. There are no costs of financial distress.
a) What is the company's cost of equity? (1 mark)
b) If the firm converts to 45% debt, what will its' cost of equity be? (2 marks)
c) If the firm converts to 60% debt, what will its' cost of equity be? (2 marks)
d) What is the company's WACC in part (c)? (2 marks)
