Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:Debt (D) 45% at rD = 9.5%Equity (E) 55%Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T c = 40%. Calculate Gaucho’s after-tax weighted-average cost of capital.

Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:Debt (D) 45% at rD = 9.5%Equity (E) 55%Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T c = 40%. Calculate Gaucho’s after-tax weighted-average cost of capital.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 4P

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