M&M Proposition 1: A firm that is financed completely with equity currently has a cost of capital

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M&M Proposition 1: A firm that is financed completely with equity currently has a cost of capital equal to 15 percent. Assume that the assumptions in Modigliani and Miller’s Proposition 1 hold and that the firm’s management plans to change its capital structure to 50 percent debt and 50 percent equity. What will be the cost of equity after the change if the cost of debt is 10 percent?

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Muhammad Salman Alvi

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