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Unformatted text preview: Capital Structure mix of long term debt (D) and equity (E) D + E = V (value) Geo (or geo thermal) pays 8% for debt (cost of debt) Pays 14% for equity (cost of equity) Market value of debt - $194 = 30% Market value of equity - $453 = 70% V = $647 Company return = (30%)(8%) + (70%)(14) Company return = 12.2% Debt is issued out as a bond and it is tax deductable. Tax rate of 35% The cost of debt after tax 8% * (1-tax rate) = 8%(.65) = 5.2% Company return = (30%)(5.2%) + (70%)(14%) Company return = 11.4% WACC weighted average cost of capital -expected rate of return on a portfolio of all the firms securities WACC = (D/V) * (r debt) * (1-tax rate) + (E/V) * (r equity)...
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