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The Wolves Company is financed by 50% debt, and 50% equity.Their debt has an 8.5% annual interest rate. Their published Beta Coefficient is 1,57. The Risk Free Rate on U.S Treasury Securities is 5% and the return on the market portfolio is 10%. Wolves in not sure that they have the optimum mix of debt and equity. They are considering the following debt/equity capital structures. 1) Compute Wolves present weighted average cost of capital. @) Compute the weighted average cost of capital for each potential structure. Assume a 40% corporate tax rate. Should Wolves change their capital Structure? If so, to which of the following structures? why? ( show all work)
a- 40% debt with 8% coupon rate, and 60% equity
b- 60% debt with 9% coupon rate, and 40% equity
c-80% debt with a 10% coupon rate, and 20 % equity
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