Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it...

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Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following mar

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Answer 1

Answer #1

Under MM II
Cost of Levered Equity = Cost of Unlevered Equity +(Cost of Unlevered Equity- Cost of Debt)* Debt*(1-Tax Rate)/ Equity
=14%+(14%-8.9%)*44%*(1-40%)/56% =16.40%

After Tax WACC =Weight of Equity*Cost of equity+Weight of Debt*Cost of Debt*(1-Tax Rate)
=56%*16.40%+44%*8.9%*(1-40%)=11.53%

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Answer 2

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