Proportions of debt and equity financing
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(Capital Structure weights). The required return on debt (before taxes) is 7.50%, 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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The solution explains how to determine the proportions of debt and equity financing
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Cost of capital = proportion of debt X after tax cost of debt + proportion of equity X cost ...
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