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You are evaluating how much your company can afford to borrow. There are currently 7.5 million shares outstanding with a price of 100 per share.
You are evaluating how much your company can afford to borrow.
There are currently 7.5 million shares outstanding with a price of 100 per share. The market value of the firms outstanding debt is currently 200 million. You are rated presently as BBB.
Beta of the stock is 1.45.
Risk-free rate is 5%.
Marginal tax-rate of 35%.
Market premium is 6%.
The current BBB rate is 10% while the B rate is 12%.
If you borrow 100 million more, the rating of your company will change to B.
- What would be the firms weighted average cost of capital after the additional borrowing?
- Would you decide to proceed with the additional borrowing? explain
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