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Calculate the after-tax cost of debt

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Question - Govan Inc. has a capital structure that consists of $500,000 of common shares, $100,000 of retained earnings, and $400,000 of long-term debt. The debt carries interest at the rate of 8% per annum. The corporate tax rate is 25%. The required rate of return on equity is 15%.

Required -

(a) Calculate the following:

(i) The after-tax cost of debt

(ii) The weighted average cost of capital

(b) What do you think would happen if Govan Inc. tried to borrow $5,000,000 to finance an expansion project?

Reference no: EM133042156

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