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Suppose you are a financial analyst of ABC Company which was 100% equity financed with net worth of Rs. 10 million and Weighted Average Cost of Capital of 22%.
Management of the company has decided to change its capital structure by adding Rs. 4 million in debt at 14% cost of debt. Net income and cost of equity were Rs. 2,040,000 and 16.4% respectively after this restructuring. Moreover, Tax rate is 30%.
i. WACC of levered firm by ignoring tax.
ii. WACC of levered firm by considering tax.
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2 part ka answer kya ho ga.?
2nd part ka answer hy:-
The M&M proposition is applicable as WACC is less when the company uses debt in its capital structure due to nonpayment of tax on interest payments
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