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Whispering Pines, Inc., is all-equity-financed. The expected rate of return on the company”s shares is 12 percent.
a. What is the opportunity cost of capital for an average-risk Whispering Pines
investment?
b. Suppose the company issues debt, repurchases shares, and moves to a
30 percent debt-to-value ratio (D/V=.30 ). What will the company”s
weighted-average cost of capital be at the new capital structure? The
borrowing rate is 7.5 percent and the tax rate is 35 percent.
