MM Formula

CFA Level II Corporate Finance
#1

was workin on a modigliani and miller problem where re=r0+(r0-rd)(1-tax)(d/e) and instead of using r0=100% equity financed company, the answer had r0=wacc, even though the company was not 100% equity financed.

Is the formula used to find the new cost of equity, given a change in debt, regardless of if r0=100% equity is used. Or does it only work when r0=100 Equity finance?

#2

U have to calculate r0 first under the old debt structure and then use r0 to calculate re under the new debt structure. r0 = ((re + rd )(1-t)(d/e)) / 1 + (1-T) d/e

#3

Can anyone else confirm?

#4

Try it out and thank me later.

#5

R0 is WACC of 100% equity firm.