# Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 10% and the cost of common equity is 14%, What is Martins weighted average cost of capital? Martin is considering reducing its debt load and is contemplating a 20% debt and 80% common equity mix. If they do this, what should happen

Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 10% and the cost of common equity is 14%, What is Martin’s weighted average cost of capital?

Martin is considering reducing its debt load and is contemplating a 20% debt and 80% common equity mix. If they do this, what should happen to the cost of debt (not the weighted cost – but the cost of each component)? The cost of equity (not the weighted cost)? Why?

Assume that the restructuring is completed and Martin is now 20% debt and 80% common equity. The after tax cost of debt is 8% and the cost of common equity is 10%. What is Martin’s new weighted average cost of capital? Should Martin make the capital structure change mentioned in the prior problem?.

Instead, assume that the restructuring is completed and Martin is now 20% debt and 80% common equity. But the after tax cost of debt is 9% and the cost of common equity is 13.5%. What is Martin’s new weighted average cost of capital? Now should Martin make the capital structure change mentioned in the prior problem,

For a given profitable corporation (that pays taxes), what is the most expensive form of capital (between debt and common equity)? Why? Please state two reasons.

**Related Book For**

## Taxes and Business Strategy A Planning Approach

5th edition

Authors: Myron Scholes, Mark Wolfson, Merle Erickson, Michelle Hanlon

ISBN: 9780132752671

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