Scenario: Company ABC wants to invest in a Swedish manufacturing company that has an optimal debt ratio of 60%. Company ABC's cost of equity capital is 16% and its before-tax borrowing rate is 12.3%. As the CFO of ABC, you have to justify the profitability of this investment.
Your Task: Given a marginal tax rate of 45%, calculate:
1. The weighted average cost of capital (WACC)
2. The cost of equity for an equivalent all-equity financed firm