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Explain Determining cost of equity and weighted average cost of capital

Consider the following information for an unlevered firm U:

EBIT = $1,600 annually

Unlevered value VU = $4,000

Tax rate = 34%

Cost of debt = 10%

A levered firm L in the same business risk class has a debt/equity ratio of 1.

Use the M&M Propositions to determine the

a. after-tax cost of equity for firms U and L

b. after-tax WACC for both firms.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9165481

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