question archive Evans Technology has the following capital structure Debt
Evans Technology has the following capital structure Debt
Subject:BusinessPrice: Bought3
Evans Technology has the following capital structure
Debt............................. 40%
Common equity ...............60
The aftertax cost of debt is 6 percent, and the cost of common equity (in the form of retained earnings) is 13 percent.
What is the firm's weighted average cost of capital?
An outside consultant has suggested that because debt is cheaper the equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the after-tax cost of debt is 7 percent, and the cost of common equity 9in the form of retained earnings) is 15 percent. Recalculate the firm's weight average cost of capital.
Which plan optimal in terms of minimizing the weight average cost of capital?
