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Consider the following scenarios for a company's costs of debt (rp) and equity (re) based on different debt-value ratios. Which capital-structure theory would explain these
Consider the following scenarios for a company's costs of debt (rp) and equity (re) based on different debt-value ratios. Which capital-structure theory would explain these costs? a. b. M&M Proposition without tax? M&M Proposition with tax? Static trade-off theory? C. For each of these, choose the best one that applies and explain. (Hint: You may find it useful to calculate the untaxed WACC for each scenario). 4.1 Debt-value ratio 0% 50% 70% Cost of debt 6% 6% 6% Cost of equity 10% 14% 19.33% 4.2 Debt-value ratio 0% 50% 70% Cost of debt 4% 6% 12% Cost of equity 14% 15% 28% Consider the following scenarios for a company's costs of debt (rp) and equity (re) based on different debt-value ratios. Which capital-structure theory would explain these costs? a. b. M&M Proposition without tax? M&M Proposition with tax? Static trade-off theory? C. For each of these, choose the best one that applies and explain. (Hint: You may find it useful to calculate the untaxed WACC for each scenario). 4.1 Debt-value ratio 0% 50% 70% Cost of debt 6% 6% 6% Cost of equity 10% 14% 19.33% 4.2 Debt-value ratio 0% 50% 70% Cost of debt 4% 6% 12% Cost of equity 14% 15% 28%
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