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Touring Enterprises, Inc., has a capital structure consisting of $18 million in long-term debt and $7 million in common equity. There is no preferred stock outstanding.The interest rate paid on the long-term debt is 10%. The firm is in the 35% tax bracket.
On the common equity, the Company pays an annual dividend of $1.20 and expects to increase the dividend by 5% per year. The market price of the stock is $50.
Based on this information, answer the following questions:Calculate Touring Enterprises' weighted average cost of capital .
2. If Touring Enterprises were to increase the percentage of debt in its capital structure, what would happen to the WACC ?No calculation is necessary- simply provide a short, non-numeric response.
3. Identify and explain the benefits and risks of debt financing. A two-paragraph answer will suffice.
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