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1. Kraft Company has $20 million in assets, which were financed with $4 million of debt and $16 million in equity. Kraft's beta is currently
1. Kraft Company has $20 million in assets, which were financed with $4 million of debt and $16 million in equity. Kraft's beta is currently 1.2, and its tax rate is 40%. a) Use the Hamada equation to find Kraft's unlevered beta (bU). b) What happens to Kraft's beta if the company changes its capital structure to $10 million debt and $10 million equity? c) What is the cost of capital if the company changes its capital structure to $10 million debt and $10 equity. (Hints: Risk free rate 6%, Cost of debt 10%, and Market risk premium 6%)
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