Taxes and the Cost of Capital. Here is Icknield's market-value balance sheet (figures in S millions):

The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 35%. Investors expect this level of debt to be permanent.

a. What is Icknield's WACC?

b. How would the market-value balance sheet change if lcknield retired all its debt?

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Net working capital Long-term assets Value of firm $ 550 2,150 $2,700 Debt Equity $ 800 1,900 $2,700 Net working capital Long-term assets Value of firm $ 550 2,150 $2,700 Debt Equity $ 800 1,900 $2,700

Answer rating: 100% (QA)

As per MMs Proposition I the value of the firm is unaffected by the capital structure of the firm un... View the full answer