Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:

Debt (D) 45% at rD  9.5%

Equity (E) 55%

Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T c  40%. Calculate Gaucho’s after-tax weighted-average cost of capital.

INTERMEDIATE AppendixLO1