(Solution) - Growth Transgenics Enterprises GTE is contemplating the purcha -(2025 Original AI-Free Solution)

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Growth Transgenics Enterprises (GTE) is contemplating the purchase of its rival. One of GTE's genetics engineers got interested in the financing strategy of the buyout. He learned there are two plans being considered. Plan 1 requires 50% equity funds from GTE's retained earnings that currently earn 9% per year, with the balance borrowed externally at 6%, based on the company's excellent stock rating. Plan 2 requires only 20% equity funds with the balance borrowed at a higher rate of 8% per year.
(a) Which plan has the lower average cost of capital?
(b) If GTE's owners decide that the current corporate WACC of 8.2% will not be exceeded, what is the maximum cost of debt capital allowed for each plan? Are these rates higher or lower than the current estimates?