20. After-tax WACC (S16-5) 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%

a. Use MM’s Proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 40%.

b. Calculate Gaucho’s after-tax weighted-average cost of capital.