Should the firm take on the warehouse renovation, Corporate Finance

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Question:

(a) Discuss the concept of financial gearing and its implications for share price maximisation.

(b) A firm has both, a current and a target debt-equity ratio of 0.6, a cost of debt of 15.5 percent and a cost of equity of 20 percent. The corporate tax rate is 34 percent.

The firm is considering taking on a warehouse renovation costing Rs50 million that is expected to yield a cost savings of Rs12 million a year for six years.

Should the firm take on the warehouse renovation?


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