medium · Investment Banking
A company has a Capital Structure of 60% Equity and 40% Debt. The Cost of Equity is 12%, and the pre-tax Cost of Debt is 6%.
With a tax rate of 30%, if the company shifts to a 50/50 Capital Structure and the Cost of Equity rises to 13% due to increased risk, what happens to WACC?
- It increases from 8.88% to 9.50%
- It decreases from 8.88% to 8.60%
- It increases because Equity is always more expensive than Debt
- It remains exactly 8.88%
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