Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has determined that its current cost of equity equals 12%. Omega also has $200 million in bonds outstanding with a corresponding bond yield of 7%. Assuming that the firm’s marginal tax rate equals 35%, please answer the following two questions:
(i) What is Omega Corporation’s current cost of capital (or WACC)?
(ii) What would the cost of capital of Omega Corporation be if the firm used no debt at all? How do you explain the difference with your answer in part (i)?
The question belongs to Finance and it discusses about calculation of current cost of capital and calculation of cost of capital with no debt at all.
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