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Suppose that company A has the following capital structure:
- 25% Equity,
- 10% preferred stock
- 65% debt.
Its marginal cost of equity is 12%, its marginal cost of preferred stock is 9%, and its before-tax cost of debt is 7%.
Company B has the following capital structure:
- 30% Equity,
- 20% preferred stock,
- 50% debt
Its marginal cost of equity is 11%, its marginal cost of preferred stock is 9%, its before-tax cost of debt is 8%.
Suppose the marginal tax rate is 35%.
a. Calculate the WACC for Company A (
b. Calculate the WACC for Company B
c. Analyse the results
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