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In this part (a) of this question, when calculating the cost of equity in working 2, they have assumed that the cost of debt of Haizum Co is equal to the five-year government debt yield.
Why have they done that?The formula is a Modigliani and Miller formula, and M&M assume throughout their theories that debt is risk free. The government debt is regarded as being risk free and therefore determines the risk free rate.
If you had used 7.5% in the formula instead, you would almost certainly still have got the marks.
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