(Answered) Cars corporation currently has 15 debt in its capital

Management Studies

Cars Corporation currently has 15% debt in its capital structure; however, its new CFO is considering changing the capital structure to 30% debt. The company has 4% annual coupon bonds outstanding that have a before-tax yield to maturity of 6%. Additional financial information is given below.

Risk-free rate, r_RF 2.50% Tax rate, T 25%

Market risk premium (r_M - r_RF) 5.00% Current beta, b_L 1.1

a. What is the company's WACC at its existing 15% debt ratio?

b. What would be the company's levered beta if it increased its debt ratio to 30%? Carry your answer out to 4 decimal places.

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