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Case Study of Midland 3. Sol: a. According to the passage, Thus λ=D/(D+E)=0.048 WACC=λ(1-t) r_d+(1-λ) r_e b. When debt-to-equity ratio increase from 0.05 to 0.20, λ=D/(D+E)=20/(20+100)=0.167,r_e remains the same. WACC=λ(1-t) r_d+(1-λ) r_e c. In the electric utility company, WACC=λ(1-t) r_d+(1-λ) r_e Electric utility corresponds to balance sheet A. Two distinguishable features lead me to draw.
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