Doubts

Exercise Set - Capital Structure

Re: Exercise Set - Capital Structure

by Julio Crego -
Number of replies: 0

Hi Sofia, 

I am not completely sure where the second formula comes from, but we use it without taxes. The reason is that when we pay equityholders, we always pay taxes, so their expected return and the cost for the firm are the same. This is not true for debt holders. For every euro that debtholders get, we pay 0.75 because we deduct the other 0.25.