Problem:
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in its capital structure would increase its value. The current of cost of equity is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%.
Required:
Question 1: What is the new levered cost of equity?
Question2: What will Nantucket's new weighted average cost of capital (WACC) be?
Note: Show all workings.