Answer Happy

Question 1 As an analyst, you collect the following information of Luna Inc. Luna has 25,000 common stocks outstanding with equity beta of 1.25. The book value is $50 per share and market price is $65 per share. The market risk premium is 9% and the risk-free rate is 3.5%. Luna has two bond issues outstanding. The first bond has $850,000 par value, 7.5% coupon rate, 8 years to maturity, and is trading at 105 (105% of par). The second bond has $600,000 par value, 9% coupon rate, 12 years to maturity, and is trading at YTM of 8%. All bonds pay semi-annual coupons. The tax rate is 40%. a) Using market values of equity and debt, calculate Luna's WACC. b) Calculate the unlevered beta of Luna. c) Assume everything else remains unchanged, calculate the WACC if Luna changes its D/E to 0.8 and its cost of debt is reduced by 40 basis points (100 basis points = 1%).