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Unformatted text preview: is 6 percent, that its tax rate is 40 percent, and that its cost of common stock is 10 percent. Also assume that the risk-free rate is 4 percent and that the market risk premium is 5 percent (you should now be able to calculate the firms levered beta). Given this information, determine what the firms new weighted average cost of capital will be if it changes to a capital structure of 50 percent debt and 50 percent equity (a debt/equity ratio of 0.50/0.50 or 1.0) A. 8.10% B. 6.90% C. 8.70% D. 7.50% E. 9.30% 41. Assume that a firm takes on a project that requires an initial investment in Year 0 of $50,000. Also assume that the firm raised the $50,000 by issuing $10,000 of debt at a before-tax cost of debt of 8%, and issued $40,000 of equity at a cost of equity of 15%. Given this information, and assuming that the tax rate is 40%, determine the weighted average cost of capital (WACC) for this project. A. 11.44% B. 11.98% C. 12.96% D. 12.48% E. 10.92%...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08
- Cost Of Capital