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Proportions of Debt & Equity Financing

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The required return on debt (before taxes) is 7.5%, the required return on equity is 15%, and the cost of capital is 10%. If the marginal income tax rate is 40%, what are the proportions of debt and equity financing?

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Solution Summary

The solution examines capital structure weights and the proportions of debt and equity financing.

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Cost of capital = [return on debt x (1 - tax rate) x weight of debt] + return on ...

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