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3. The Beta Corporation has an optimal debt ratio of 40 percent ts cost of equity capital is 12 percent-and its before-lax borrowing rate is 8 percent. Given a marginal tax rate of 35 percent, calculate (a) the weighted-average cost of capital, and (b) the cost of equity for an equivalent all-equity financed firm. Solution: (a) K (1-.40).12+ (40).08(1-.35) .0928 or 9.28% A weighted-average cost of capital of 9.28% for a levered firm implies: K, (1-(.35)(40). Solving for Ku yields .1079 or 10.79%. (b) K-0928
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