Metaform Ltd is currently financed with 35% debt and 65% equity. It has a cost of...

 

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Metaform Ltd is currently financed with 35% debt and 65% equity. It has a cost of equity of 10% and a before-tax cost of debt of 6%. The corporate tax rate is 17%. The firm is considering issuing more debt with a higher interest rate of 8%. The proceeds from the new debt issuance will be used to replace common equity and the size of the debt issuance is 10% of the firm's existing total capitalization. Ryan Ridley, Metaform's finance manager, states that the new weighted-average cost of capital of the firm after the issuance will be: WACC = (0.55) (10%)+(0.1)(1-0.17) (8%)+(0.35)(1-0.17)(6%) Illustrate if you agree with the above statement and explain your answer using capital structure theory. Metaform Ltd is currently financed with 35% debt and 65% equity. It has a cost of equity of 10% and a before-tax cost of debt of 6%. The corporate tax rate is 17%. The firm is considering issuing more debt with a higher interest rate of 8%. The proceeds from the new debt issuance will be used to replace common equity and the size of the debt issuance is 10% of the firm's existing total capitalization. Ryan Ridley, Metaform's finance manager, states that the new weighted-average cost of capital of the firm after the issuance will be: WACC = (0.55) (10%)+(0.1)(1-0.17) (8%)+(0.35)(1-0.17)(6%) Illustrate if you agree with the above statement and explain your answer using capital structure theory.

Answer rating: 100% (QA)

solution Equity Componend VIE 041 S New debt Component 01 1017 8 081... View the full answer