Capital half with debt and half with equity at existing rate
Course:- Financial Management
Reference No.:- EM13921141

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Gresham Corporation has 40% debt and 60% equity (market values) in its capital structure. The pretax cost of debt is 8.5%, and that of equity 15.5%. The total value of the company is $320 million and its income tax rate is 40%. Gresham has to raise $30 million in new capital, which will make the expected EBIT of the company to be $22 million, with a standard deviation of $11 million. The company has decided to raise the new capital half with debt and half with equity at the existing rates. Calculate Gresham's new WACC, and the probability that its interest coverage ratio will be less than one.

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