Assume we are in an otherwise perfect, frictionless world with corporate taxes

Finance Aug 23, 2020

Assume we are in an otherwise perfect, frictionless world with corporate taxes. Firm X has a debt-to-equity ratio of 2.25, its cost of equity is 12%, and its cost of debt is 6%. The corporate tax rate is 35%. If the firm converts to a debt-to-equity ratio of 1.25, what will its new WACC be?

Expert Solution

New WACC = 7.50%

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