I have this difficult problem I can't seem to solve. Can someone please help me?
5. Blue Co. has a weighted average cost of capital (WACC) of 14% at a debt-to-value ratio of 30%. The current return on equity is 18% and the corporate tax rate is 21%. Assume Blue keeps a constant debt-to-equity ratio.
What is the required return on debt?
Answer: 5.91 %
6. Consider the information in question 5, but now assume that the interest rate paid by Blue is 8%. Blue decides to increase the debt level. After the debt issuance, the company changes its capital structure policy moving from a constant debt-to-equity ratio policy to a constant debt policy. Also, after new debt is issued, the debt-to-value ratio is 50%.
What is now the WACC for Blue?
The answer should be 13.4 %, but I don't understand how to find it.
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