Corporate Finance Q79

79A firm with a marginal tax rate of 40% has a weighted average cost of capital of 7.11%. The before-tax cost of debt is 6%, and the before-tax cost of equity is 9%. The weight of equity in the firm's capital structure is closest to:

Option : B
Explanation : Taxes affect cost of debt only, since interest is tax deductible.
WACC = Wd Rd (1 – t) + We Re,
where Wd + We = 1 7.11 = (1 – We ) * 6 * (1 – 0.4) + We * 9,
We = 65%.

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