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The current capital structure is 35 percent debt and 65 percent equity. The after-tax cost of...

The current capital structure is 35 percent debt and 65 percent equity. The after-tax cost of our debt is 6 percent, and the cost of our equity (in retained earnings) is 13 percent. Please compute the firm’s current weighted average cost of capital. One of the things we discussed with our investor, due to the current low interest rate environment, is moving our capital structure to 45 percent debt and 55 percent equity. With this new structure, the after-tax cost of debt will rise to 7 percent, and the cost of equity (in retained earnings) will go to 14 percent. Based on this information, compute the firm’s new weighted average cost of capital. Which is the more optimal in terms of minimizing the weighted average cost of capital? Why?

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