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Problem:

Acetate Inc. has equity with a market value of $25 million and debt with a market value of $10 million. The firm's weighted average cost of captial is 15.8% and its pretax cost of debt is 10%. The firm is subject to a corporate tax rate of 35%. Assume no other imperfections in the financial market.

Required:

Question 1: What is Acetate's cost of equity?

Question 2: What is the cost of captial for an otherwise identical all-equity firm?

Question 3: What would Acetate's weighted average cost of captial be if the firm borrows additional $5 million and uses the proceeds to repurchases shares?

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

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91162749

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