Question: Problem #2 (7 marks) Eastern Townships Limited currently has no debt. Their cost of borrowing is 7%. The firm's cost of capital is currently 10.5%

Problem #2 (7 marks) Eastern Townships Limited currently has no debt.

Problem #2 (7 marks) Eastern Townships Limited currently has no debt. Their cost of borrowing is 7%. The firm's cost of capital is currently 10.5% and the tax rate is 40%. There are no costs of financial distress. a) What is the company's cost of equity? (1 Mark) b) If the firm converts to 35% debt, what will it's cost of equity be? (2 Marks) c) If the firm converts to 45% debt, what will it's cost of capital (WACC) be? (4 marks)

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