As requested, I include full question. only need answer part d)https://www.bartleby.com/questions-and-answers/q1.-consider-an-allequity-firm-that-is-contemplating-going-into-debt.-the-market-value-of-equity-is-/c24b4703-bc9d-4a3a-8d7f-8964bef82326Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.Current ProposedAssets $10,000 $18,000Debt $0 $8,000Equity $10,000 $10,000Debt/Equity ratio 0.00 1.00Interest rate n/a 7%Shares outstanding 500 500Share price $20 $20(a) If the required rate of return on unlevered equity is 10%, fill out the following table for the company before the debt is issued:Recession Expected ExpansionEBIT $500 $1,000 $1,500Interest 0 0 0Net incomeEPSROAROE(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.(c) If an investor is not happy with the debt the company added, show the steps the investor can take to do homemade “un-leverage” and earn the same ROA and ROE as in part (a). Set up a table to show that the unleveraged works.(d) If there are no taxes, calculate the WACC before and after the debt is added (assume the 7% payment on the debt = YTM).(e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?

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Asked Nov 3, 2019
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As requested, I include full question. only need answer part d)

https://www.bartleby.com/questions-and-answers/q1.-consider-an-allequity-firm-that-is-contemplating-going-into-debt.-the-market-value-of-equity-is-/c24b4703-bc9d-4a3a-8d7f-8964bef82326

Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.

Current Proposed
Assets $10,000 $18,000
Debt $0 $8,000
Equity $10,000 $10,000
Debt/Equity ratio 0.00 1.00
Interest rate n/a 7%
Shares outstanding 500 500
Share price $20 $20

(a) If the required rate of return on unlevered equity is 10%, fill out the following table for the company before the debt is issued:

Recession Expected Expansion
EBIT $500 $1,000 $1,500
Interest 0 0 0
Net income
EPS
ROA
ROE

(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

(c) If an investor is not happy with the debt the company added, show the steps the investor can take to do homemade “un-leverage” and earn the same ROA and ROE as in part (a). Set up a table to show that the unleveraged works.
(d) If there are no taxes, calculate the WACC before and after the debt is added (assume the 7% payment on the debt = YTM).

(e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?

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Expert Answer

Step 1

Hence, WACC before debt is 10%, and is determined by multiplying cost of equity capital ...

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Cost of equity capital x Weight of equity capital WACC before debt =10%x100% 10%

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