The company Tronto is a gaming company. The company is currently financed only with equity....
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The company Tronto is a gaming company. The company is currently financed only with equity. The company is now facing new challenges and has decided to take out a loan. Equity currently amounts to SEK 10,000,000. After a change in the capital structure, equity will be SEK 5,000,000. The required return on equity currently amounts to 7% before tax. The average debt interest rate is 5%. The tax rate is 25%. The company is expected to make a profit.
Your task is to, based on MM1 and MM2, find out what consequences the proposed change will have for the company. - How is the WACC affected? - How is the company's value affected? - Calculate the debt / equity ratio after the change has been made.
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