DDD is an unlevered firm with a cost of capital of 16.9%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $7 million in perpetual debt at a pre-tax cost of 4.7%. The firm expects to generate EBIT of $8 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 29%. Ignore financial distress costs.

Based on MM Prop II, what will be DDD's weighted average cost of capital if it takes on the debt?

Please enter your answer to four decimal places.

Answer rating: 100% (QA)

Based on the ModiglianiMiller Proposition II the weighted average cost of capital WACC for DDD after ... View the full answer