After-tax cost of debt=7.5*(1-tax rate)
=7.5*(1-0.4)=4.5%
WACC=Respective costs*Respective weight
a.WACC=(4.5*0.4)+(7*0.05)+(11.5*0.55)
=8.475%
b.WACC=(4.5*0.4)+(7*0.05)+(12.29*0.55)
=8.910%(Approx).
Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future...
Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 7.8%, the firm's cost of preferred stock, rp, is 7.3% and the firm's cost of equity is 11.8% for old equity, rs, and 12.42% for new equity, re. What is...
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