ABC, Inc. has a debt equity ratio=1.2. The firm has a cost of equity
of 12% and a cost of debt of 8%. What will the cost of equity be if
the target debt/equity ratio increases to 2.0 and the cost of debt and
WACC do not change? Ignore taxes, but please show all work. It is
multiple choice.
a. 10.56%
b. 11.12%
c. 13.35%
d. 14.74%
e. 15.45%

Pheifer --


Debt = 1.2
Equity = 1

As percentages,
Debt = 54.6%
Equity = 45.5%

You first have to figure the starting WACC (ignoring taxes here):
.546 * 8% + .455 * 12% =  4.36% + 5.46% = 9.82%

DEBIT/EQUITY CHANGES

Debt = 2
Equity = 1

As percentages,
Debt = 66.7%
Equity = 33.3%

WACC = Dwt * D% + Ewt * E%

9.82% =  8% * .67 + .333 * E%
4.46% = .33 * E%
E = 13.38%

So it's C (using 3 decimal places in the first half of the problem
created the rounding error).

Best regards,

Omnivorous-GA