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    Cost of equity and capital

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    How will Rensselaer Felt's WACC and cost of equity change if it issues $ 50 million in new equity and uses the proceeds to retire long- term debt? Assume the company's borrowing rates are unchanged. Use the three- step procedure .
    Step 1 Calculate the opportunity cost of capital.
    Step 2 Estimate the cost of debt, r D , at the new debt ratio, and calculate the new cost of equity.
    Step 3 Recalculate the weighted- average cost of capital at the new financing weights.

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    Solution Preview

    The capital structure of the firm is as below:
    Short-term debt $75,600
    Long-term debt $208,600
    Share holder equity (7.46 million*$46)=$343,160

    We ...

    Solution Summary

    This post shows how to calculate opportunity cost of equity, cost of capital.