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Accounting

Problem:

A company is trying to decide whether to revise its target capital structure. Currently, it targets 50% debt and 50% equity. However, it is considering changing the mix to 70% debt and 30% equity. Their debt currently has an after-tax cost of 6% and the equity costs them 12%. They do not have any preferred stock.

Required:

Question 1: What is their current WACC?

Question 2: Assuming that the cost of debt and equity remain unchanged, what will be their WACC if they incerase debt to 70% as proposed?

Note: Please show how you came up with the solution.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91171895

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