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Fresh after the last year of your Rotman Commerce program, you land a summer internship doing your dream job-analyzing the capital structure of companies. Your supervisor just recently sent you the following information about a diamond mining company, Hugo Diamond Mine (HDM) Inc., which is based in Northern Ontario. Assume the corporate tax rate is 35%. Table 1 Capital Structure Security Type Debt Common stock Total $385.7 $1,200.0 $1,585 Required Rate of Return 9.0% 13.5% (A) Calculate the weighted average cost of capital (WACC). [1 point] (B) Now suppose that HMD Inc. is excused from paying corporate taxes. First, calculate how such a tax change would impact the WACC of HDM Inc. Second, in addition to the no tax assumption, suppose that HMD Inc. wants to pay off all its debt by issuing new equity. How would the cost of equity change? If it does change, state the main reason of the change in one bullet point. [3 points] Fresh after the last year of your Rotman Commerce program, you land a summer internship doing your dream job-analyzing the capital structure of companies. Your supervisor just recently sent you the following information about a diamond mining company, Hugo Diamond Mine (HDM) Inc., which is based in Northern Ontario. Assume the corporate tax rate is 35%. Table 1 Capital Structure Security Type Debt Common stock Total $385.7 $1,200.0 $1,585 Required Rate of Return 9.0% 13.5% (A) Calculate the weighted average cost of capital (WACC). [1 point] (B) Now suppose that HMD Inc. is excused from paying corporate taxes. First, calculate how such a tax change would impact the WACC of HDM Inc. Second, in addition to the no tax assumption, suppose that HMD Inc. wants to pay off all its debt by issuing new equity. How would the cost of equity change? If it does change, state the main reason of the change in one bullet point. [3 points]
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A To calculate the weighted average cost of capital WACC we need to determine the weights of each co... View the full answer
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