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Question 3 (15 marks) A corporate (taxed at 35%) has a financing structure made of 60% debt and 40% equity. The debt is borrowed at
Question 3 (15 marks) A corporate (taxed at 35%) has a financing structure made of 60% debt and 40% equity. The debt is borrowed at 8.0% from the bank, and the cost of equity is deemed to be 12%. a) Calculate the WACC of this firm (5 marks) b) Simulate what the WACC would be if debt was made to represent 20% or 80% of the capital structure. Explain the outcome and draw the necessary conclusions as to the optimal capital structure. (5 marks) c) Explain under which 3 conditions the WACC of a company can be used as the discount rate to assess the financial validity of investment projects
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