Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £100m of debt on which it pays a 5% interest rate. Assume no taxes and perfect capital markets...

Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £100m of debt on which it pays a 5% interest rate. Assume no taxes and perfect capital markets where investors and firms can lend and borrow at the same risk-free rate. The relevant numbers are provided in the following table (in £ m):

Assume A is fairly priced, what would be B’s weighted average cost of capital in the absence of arbitrage opportunities?

Extracted text: A В Value of Firm 200 250 Debt 100 Equity 200 150 Earnings before interest 20 20 Interest payment 5 Interest rate Not Applicable 5%