WF118 CB W7 Answer for Reading Quiz Chapters 16,17,18.docx - Answer Capital Budgeting Reading Quiz Chapters 16,17 and 18 1 Martin Corporation is

WF118 CB W7 Answer for Reading Quiz Chapters 16,17,18.docx...

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Answer Capital Budgeting Reading Quiz -- Chapters 16,17 and 18 1. Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 6% and the cost of common equity is 9%. What is Martin’s weighted average cost of capital? .4*.06 + .6*..09 = 7.8% 2. Martin is considering increasing its debt load and is contemplating a 50% debt and 50% common equity mix. If they do this, what should happen to the cost of debt? The cost of equity? Why? The cost of debt and the cost of equity will both increase because there is more risk (bankruptcy or liquidation) for both sources of capital. 3. Assume that the restructuring is completed and Martin is now 20% debt and 80% common equity. The after tax cost of debt is 8% and the cost of common equity is 10%. What is Martin’s new weighted average cost of capital? .5*.08 + .5*.10 = 9.0%
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