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Suppose the WACC (weighted average cost of capital) of a firm is 12.5 percent, while its...

Suppose the WACC (weighted average cost of capital) of a firm is 12.5 percent, while its before-tax cost of debt is 3 percent. The firm’s debt-to-equity ratio is 1, and the cost of equity of the corresponding unlevered firm is 15 percent. By assuming that the Modigliani-Miller Theorem with corporate taxes holds, answer the following questions.

i) What is the effective corporate tax rate for the firm?

ii) What is the cost of equity of the firm?

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