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Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:

Debt (D) 45% at rD =9.5%
Equity (E) 55%

Use MM's proposition 2 to find out the new cost of equity. Gaucho pays taxes at a marginal rate of Tc=40%. find out Gaucho's after-tax weighted-average cost of capital.

 

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