Final answer:
To calculate the new cost of debt, we need to use the weighted average cost of capital (WACC) formula. the firm swapped its capital structure, and based on the given information, the new cost of equity is estimated to be 19%. The new cost of debt is expected to be less than 4%.
Step-by-step explanation:
To calculate the new cost of debt, we need to use the weighted average cost of capital (WACC) formula. The WACC formula is: WACC = (E/V) * Re + (D/V) * Rd * (1 - T), where E is the market value of equity, V is the total market value of equity and debt, Re is the cost of equity, D is the market value of debt, Rd is the cost of debt, and T is the corporate tax rate.
In this case, the firm swapped its capital structure from 33% debt and 67% equity to 67% debt and 33% equity. Let's assume that the market value of equity and debt remains the same after the swap. Therefore, the new cost of equity, Re, can be calculated using the formula: 19% = (0.33 * 145) + (0.67 * Re), where Re is the new cost of equity. Solving this equation, we find that Re ≈ 26.64%.now, let's calculate the new cost of debt, Rd. We know that the weighted average cost of capital (WACC) remains the same at 5%. Therefore, we can use the formula: 5% = (0.33 * 145) + (0.67 * Rd * (1 - T)). Given that the tax rate, T, is not provided in the question, we cannot calculate the exact value of Rd. However, we can determine that the new cost of debt, Rd, should be lower than the previous cost of debt, which was 4%. therefore, the new cost of debt is expected to be less than 4%.