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Gaucho Services starts life with all-equity financing and a cost of equity of 16%. Suppose it refinances to the following market-value capital structure: Debt (D)

Gaucho Services starts life with all-equity financing and a cost of equity of 16%. Suppose it refinances to the following market-value capital structure:

Debt (D) = 47% rD = 9.8% Equity (E)= 53%

Use MMs proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 30%. Calculate Gauchos after-tax weighted-average cost of capital.

After-tax WACC =

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