Suppose company ABC is currently all-equity financed. The company will be worth either 250M or 90M...
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Suppose company ABC is currently all-equity financed. The company will be worth either 250M or 90M depending on whether the economy is strong or weak in one year. The current risk-free rate is 6% and the cost of capital of the company is 25%. Suppose that the corporate tax rate is 40%. (3 points) What is the after-tax cost of debt if ABC recapitalizes and borrows $80M at time t=0? Explain. (8 points) Now suppose that the corporate tax rate is 40%. On the grided paper below draw graphs of r, wacc E, and the after-tax cost of debt. Make your graph neat and detailed. Indicate all important values A' Suppose company ABC is currently all-equity financed. The company will be worth either 250M or 90M depending on whether the economy is strong or weak in one year. The current risk-free rate is 6% and the cost of capital of the company is 25%. Suppose that the corporate tax rate is 40%. (3 points) What is the after-tax cost of debt if ABC recapitalizes and borrows $80M at time t=0? Explain. (8 points) Now suppose that the corporate tax rate is 40%. On the grided paper below draw graphs of r, wacc E, and the after-tax cost of debt. Make your graph neat and detailed. Indicate all important values A'
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