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ABCCo Inc. is currently an all-equity firm. Because of strong investment opportunities, it needs to raise $5,500,000 in additional funds. By investing in these opportunities, it expects future earnings to be a constant $1,000,000 per year. The firm’s unlevered cost of equity is 13%, and its before tax cost of debt is 7.5%.

If corporate taxes are 35%,

A) What is the value of ABCCo if it issues new equity to raise the funds?

B) What is the value of ABCCo if it issues debt to raise the funds?

C) If ABCCo issues debt, what will the new cost of equity be?

D) If ABCCo issues debt, what will the new weighted average cost of capital be?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92843544

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