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The cost of equity of A Ltd which is an equity firm is 15% and therefore its WACC is 15%. Another company B Ltd is identical...

      

The cost of equity of A Ltd which is an equity firm is 15% and therefore its WACC is 15%.
Another company B Ltd is identical in all respect, except that it is geared with a debt: equity ratio of 1:4. The cost of debt capital is 15% and this is risk-free cost of debt. What is B Ltd's WACC?

  

Answers


Ruth
Solution
Keg=15%+(15%-5%)x1/4=17.5%
WACC=(0.2x0.05)+(0.8x0.175)=15%
The WACC in the geared firm is the same as the WACC in the ungeared firm.
NatalieR answered the question on June 17, 2022 at 06:55


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