Question: 5. A financial analyst is evaluating the capital structure for Plover, Inc., a European-based unleveraged firm with a constant (perpetual) cash flow of EUR10.0 million

5. A financial analyst is evaluating the capital structure for Plover, Inc., a European-based unleveraged firm with a constant (perpetual) cash flow of EUR10.0 million per year before taxes. The firm has a market value of EUR100.0 million and a corporate tax rate of 20%. Plover plans to issue EUR35.0 million in debt to retire an equivalent amount of equity, so the size of the firm will remain unchanged. The debt will have a cost of 4.5%. Assume the cost of financial distress is close to zero.

After the debt issuance and change in the capital structure, Plover’s WACC is closest to:

A. 5.47%.

B. 7.48%.

C. 8.82%.

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