Answer to Question #8976 in Finance for Leela Singh

Question

ATM Inc. has a capital structure consisting of 20 percent debt and 80 percent equity. ATM debt
currently cost 8 percent. The risk-free rate is 5 percent, and the market risk premium is 6 percent.
ATM estimates that its cost of equity is currently 12.5 percent. The company has a 40% tax rate. ATM
is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead
with the proposed change , the cost of the company's debt would rise to 9.5%.The propose change
will have no effect on the company's tax rate.

a) What is ATM’s current WACC?
b) What is the current beta on ATM’s common stock?
c) What would ATM's Beta be if the copany had no debt?
d) What would be the company's new cost of equity if it adopted the proposed change in
capital structure?
e) What would the company's new WACC be if it adopted the proposed change in capital
structure ?