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What is the firms wacc under a classical tax system

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Reference no: EM133002564

Dampier Diamond Mines Ltd has a target capital structure of 75% ordinary shares, 5% preference shares and 20% debt. Its cost of equity is 11.3%, the cost of preference shares is 4.9% and the cost of debt is 5.8%. The relevant tax rate is 30%.

Problem a) What is the firms WACC under a classical tax system?

Problem b) The company CEO has approached you about Dampier Diamonds capital structure. He wants to know why the company does not use more preference-share financing, since it costs less than debt. What would you tell the CEO.

Reference no: EM133002564

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