hard · Principles of Finance cost-of-capital-structure
A firm currently has an all-equity capital structure with a cost of equity of 12%. The management decides to perform a leveraged recapitalization, shifting to a debt-to-equity ratio of 1.0.
If the pre-tax cost of debt is 6% and the marginal tax rate is 25%, what is the new cost of equity according to the Modigliani-Miller Proposition II with taxes?
- 13.5%
- 15.0%
- 18.0%
- 16.5%
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