Modigliani-miller irrelevance of borrowing

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Assume that the debt-equity ratio of Ex Nihilo Co has been raised to 1.0. Modigliani-Miller irrelevance of borrowing does not hold, so the increase in borrowing will increase both the PV of the corporate tax shield of borrowing and the PV of the expected bankruptcy costs. The PV of the tax shield is £0.6bn and the PV of the bankruptcy costs is £0.1bn. The cost of debt capital is 3.6%. Assuming that both the PV of the tax shield and the PV of the bankruptcy costs have a beta of 1.5, what is the new WACC and the new cost of equity capital?

Reference no: EM132517596

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