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4. The company "Gaucho Services" began to operate only with financing from its owners (all equity financing) and has a cost of equity of 14%, suppose they decide to refinance with the following capital structure at market values ??(market value capital structure): Debt (D) 45% rd = 9.5% Equity (E) 55% Calculate the cost of equity considering that the tax (the marginal tax rate) is 40%, and calculate the weighted average cost of capital. (15 points)
| Computation of Weighted Average Cost of Capital (WACC): | |||
| Source of Capital | Weight | After-tax Cost of Capital | Weighted Cost of Capital |
| Debt | 45% | 5.70% | 2.57% |
| Equity | 55% | 14.00% | 7.700% |
| WACC = | 10.27% | ||
| Computation of Weighted Average Cost of Capital (WACC): | |||
| Source of Capital | Weight | After-tax Cost of Capital | Weighted Cost of Capital |
| Debt | 0.45 | =9.5%*(1-40%) | =45%*5.7% |
| Equity | =1-45% | 0.14 | =55%*14% |
| WACC = | =2.57%+7.7% | ||
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