In a perfect market, Amora Inc. does not have debt but is able to borrow at 8
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Question:
In a perfect market, Amora Inc. does not have debt but is able to borrow at 8 percent. The firm’s WACC is currently at 11.5 percent.
- What is Amora’s cost of equity? (2 marks)
- What would Amora’s cost of equity be if the company decides to convert its capital structure to 35 percent debt? (6 marks)
- What would Amora’s cost of equity be if the company decides to use 50 percent debt instead? (6 marks)
- Assume now there are corporate taxes of 35 percent, what is the after-tax WACC for part (c). (6 marks)
- Briefly comment on this after-tax WACC calculated in part (d) with unlevered cost of capital. (3 marks)
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