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SelfStudy Problem 13 05You are analyzing a firm that is financed with 55 percent debt and 45 percent

Question

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.

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

%.

Financial Accounting