Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $750,000 in stock.Franklin is a levered firm with $375,000 of stock and an interest rate on debt of 8 percent.Both Delta and Franklin have an expected EBIT of $90,000.Ignore taxes.Delta has a WACC of _____ percent and Franklin's WACC is _____ percent.
A)12;16
B)12;14
C)12;12
D)14;12
E)16;16

Question

Quizplus · Accepted Answer

WACC_Delta = Re_Delta = $90,000/$750,000 = .12,or 12%Re_Franklin = {$90,000 - [.08 × ($750,000 - 375,000)]}/$375,000 = .16WACC_Franklin = ($375,000/$750,000 × .16)+ ($375,000/$750,000)× .08)= .12,or 12%

Delta Mills and Franklin Mill Are Identical Firms Except for Their