Problem: Taxes and the Cost of Capital (LO2)
Here is Icknield's market-value balance sheet (figures in $ millions):
Net working capital $ 550 Debt $ 800 Long-term assets 2,150 Equity 1,900 Value of firm $ 2,700 $ 2,700
The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 35%. Investors expect this level of debt to be permanent.
a. What is Icknield's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. How would the market-value balance sheet change if Icknield retired all its debt? (Leave no cells blank - be certain to enter "0" wherever required.)