Question
ABC Corporation is currently financed by 100% equity. Its current cost of equity is 10%. The company can borrow at 6%. The corporate tax rate
ABC Corporation is currently financed by 100% equity. Its current cost of equity is 10%. The company can borrow at 6%. The corporate tax rate is 20%.
(i) What is ABC's current WACC?
(ii) If ABC changes it capital structure to 20% debt and 80% equity, what would be its (a) cost of equity (b) WACC under the new capital structure (i.e. 20% debt and 80% equity)?
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Financial Economics
Authors: Zvi Bodie, Robert C Merton, David Cleeton
2nd Edition
0558785751, 9780558785758
