The Miller Modigliani I theorem posits that debt policy is irrelevant, when it comes to firm value. Assume that you have a firm that is funded entirely with equity and has a beta (unlevered) of 0.90; the risk free rate is 3% and the equity risk premium is 6%.

What will happen to the cost of capital, if the firm moves to a 30% debt ratio?

Answer 1

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Assume there is corproate taxes, what will happen to the cost of capital if the firm moves to a 50% debt ratio?

Answer 2

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