Question
ABC Inc, a U.S. company, is considering changing its capital structure. The company has debt and equity in its capital structure and the current D/E
ABC Inc, a U.S. company, is considering changing its capital structure. The company has debt and equity in its capital structure and the current D/E ratio is 0.4, the current weighted average cost of capital of ABC is 10.69% p.a. The current before-tax cost of debt capital for ABC is 10% p.a., the current cost of equity is 12.17% and current equity beta is 1.024. The risk-free rate and market risk premium are 5% and 7% p.a. respectively. The corporate tax rate is 30%. If the company switches to a capital structure with 100% equity, which of the following is closest to the new weighted average cost of capital of ABC Inc (using the approach covered in the lecture)?
10.60% p.a.
7.42% p.a.
12.17% p.a.
7.00% p.a.
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