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Chapter 7









                   Example 3





                   A company has:

                       Current cost of equity of 12%

                       Ungeared cost of equity of 10%


                       WACC of 9.25%

                       Market value of equity of $210 million

                       Market value of debt of $70 million

                       Tax rate of 30%.

                   The company plans to raise $20 million of debt and use these funds to
                   repurchase shares.


                   According to Modigliani and Miller’s theory with tax, WACC would move
                   to:

                   A    8.62%


                   B    10.35%

                   C    9.06%

                   D    10.87%


























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