You are analyzing a firm that is financed with 55 percent debt and 45 percent

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Self-Study Problem 13.05

You are analyzing a firm that is financed with 55 percent debt and 45 percent

equity. The current cost of debt financing is 9 percent, but due to a recent downgrade by the rating agencies, the firm’s cost of debt is expected to increase to 11 percent immediately.

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How will this increase change the firm’s weighted average cost of capital if you ignore taxes? (Round answer to 2 decimal places, e.g. 15.25%.)

Ignoring taxes firm’s weighted average cost of capital will by

%.

If you consider taxes and the firm is subject to a 40 percent marginal tax rate? (Round answer to 3 decimal places, e.g. 15.250%.)

Considering taxes firm’s weighted average cost of capital will by

%.

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