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Question - Sincro Ltd is assessed at 27.50% tax rate and has the following capital structure.
Preference Shares 35%
Debt 15%
Ordinary Share Capital 50%
The after-tax cost of debt is 6.5%; the cost of preference shares is 10%, and the cost of ordinary share equity is 13.5%. As an alternative to the existing capital structure, a consultant suggest the following modifications:
Debt 60%
Preference Shares 5%
Ordinary Share Capital 35%
Under this new and more debt-oriented arrangement, the before-tax cost of debt is 8.80%; the cost of preference shares is 11%, and the cost of equity is 15.60%.
Required -
1. Calculate the company's existing weighted average cost of capital (WACC). Your answer: a. %. Case sensitive: Type in 12.00 for 12.00%.
2. Recalculate the company's weighted average cost of capital (WACC), using the capital structure suggested by the consultant. Your answer: b. %. Case sensitive: Type in 12.00 for 12.00%.
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