Problem:
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in their capital structure would increase their value. The current cost of equity is 12%. Under consideration is issuing $300,000 in new debt (perpetuity) 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 their corporate tax rate is 34%.
Questions:
Q1. What will the corporations's new WACC be?
Q2. If the marginal tax bracket is zero what would the new WACC be?