Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $680,000 of equity.Franklin is a levered firm with $425,000 of equity and $255,000 of debt at an interest rate of 6.2 percent.Both Delta and Franklin have an expected EBIT of $84,000.Ignore taxes.Delta has a WACC of ________ percent and Franklin's WACC is ________ percent.
A)12.35;11.05
B)12.35;14.10
C)12.35;12.35
D)14.10;14.10
E)16.10;14.10

Question

Quizplus · Accepted Answer

WACC_Delta = RS_Delta = $84,000/$680,000 = 0.1235,or 12.35% RS_Franklin = [$84,000 − (0.062 × $255,000)]/$425,000 = 0.1604,or 16.04% The levered cost of equity can also be computed as: RS_Franklin= 0.1235 + ($255,000 / $425,000)(0.1235 − 0.062)= 0.1604,or 16.04% WACC_Franklin = 0.1604[$425,000/($425,000 + 255,000)] + 0.062[$255,000/($425,000 + 255,000)] = 0.1235,or 12.35%

Delta Mills and Franklin Mill Are Identical Firms Except for Their