Cost of capital the query company has identified two, Ask an Expert

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(Cost of capital) The Query Company has identified two alternative capital structures. If the firm borrows 15% of the value of the firm, it can borrow the money at rd = 10%, and the shareholders will have a required return of re = 18%. If the firm borrows 45% of the value of the firm, it can borrow the money at rd = 12%, and the shareholders will have a required return of re = 23.21%. Query pays corporate taxes at the rate of 35%. If Query is operating in an essentially perfect capital market except for taxes, are the taxes approximately symmetric, or are they asymmetric?

a. What is the WACC with 15% debt?

b. What is the WACC with 45% debt?

c. Are the taxes approximately symmetric, asymmetric where debt is favorited, or symmetric equity is favored?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92859722

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