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Financing and Valuation

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M&M Proposition 1: Marx and Spender has a current WACC of 23 percent. If the cost of debt capital for the firm is 9 percent and the firm is currently financed with 48 percent debt, the current cost of equity capital for the firm is ____%. Assume that all the assumptions of Modigliani and Miller Proposition 1 hold.

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Solution Summary

This solution illustrates the application of M&M Proposition #1.

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Weighted-average cost of capital
=(Cost of equity*equity percent of capital) + (after-tax cost of debt*debt percent of ...

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