According to Modigliani and Miller’s theory of capital structure with tax, what will be Company B’s new cost of equity?

Company B is an all equity financed company with a cost of equity of 10%.

It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.

These bonds will pay a coupon rate of 5% and have an interest yield of 6%.

Company B pays corporate tax at the rate of 25%.

According to Modigliani and Miller’s theory of capital structure with tax, what will be Company B’s new cost of equity?

A)

B)

C)

D)

A . Option A
B . Option B
C . Option C
D . Option D

View Answer

Answer: B