What is the name of the model that you would use

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Question - Opportunity Cost of Capital - The opportunity cost of capital is a representation of the "effective interest rate" that someone experiences when they choose to invest their money into a project or real assets. We have talked about this extensively in class, and it has many names, but one of them was mentioned on many occasions.

1. What is the name (and abbreviation) of the model that you would use to represent a company's Opportunity Cost of Capital and the equation (formula) that is used to calculate it?

2. A company has 45 million euros worth of debt for which it must pay 6% interest. It has also issued shares, and it currently has 10 million shares outstanding. These shares trade at 5.50€ per share, and the shareholders demand a required return of 12%. The company is located in Chile, where the government has reduced the corporate tax rate to 10% in response to the global CoViD pandemic... What is the percentage of the company that is financed by debt?

3. For the company mentioned in the question (2), what is the percentage of the company that is financed by equity?

4. For the company described in questions (2) and (3), what is the Opportunity Cost of Capital for this company?

Reference no: EM133138344

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