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# 35 beta and market return are given by the

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Unformatted text preview: rage cost of capital as follow: After- tax WACC = 1 − T × D E × r! + × r! E+D E+D = 1 − 35% × 29.31% × 7.4% + 70.69% × 9.11% = 7 .8 5 % Answers to Q4: Since the company has altered its capital structure, the inherent risk of its equity change because the adjusted portion of debt, in- this case lower by debt portion becoming 25% and equity portion 75% as a result, making it less risky and therefore, we have to determine a new cost of equity through the following formula. D E Cost of new equity (r! (!"# !"#\$%&) ) = r + r − r! × …whereas ‘r’ denotes WACC of the old financial weight Hence, we first have to re- determine the old WACC from Q3 on a pre- tax basis to decompose for actual risk of the existing cost of capital. Pre − tax WACC!"#\$%" !"# !"#\$%& !" !"#\$%"& !"#\$%"\$#& (r) = D E × r! + × r! E+D E+D = 29.31% × 7.4% + 70.69% × 9.11% = 8.61% And with the new cost of debt of 7.2%; ∴ Cost of new equity (r! (!"# !"#\$%&) ) = 8.61% + 8.61% − 7.2% × 25% = 9.08% 75% Page 3 Next, we can identify the company’s new post- tax weighted average cost of capital per the new capital structure by; After- tax WACC = 1 − T D E × r! + × r! = 1 − 35% 25% × 7.2% + 75% × 9.08% = 7 . 9 8% E+D E+D Page 4...
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