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3. Consider Firm L, a levered firm that is financed by equity and debt. The following information is available. V.EE, + D - $35 +

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3. Consider Firm L, a levered firm that is financed by equity and debt. The following information is available. V.EE, + D - $35 + $35 = $70 k = 20% ka -8% 10% (a) Calculate ke of Firm L. (5 points) FirmL needs to raise additional capital of $30. The funds could be raised by debt financing only, by equity financing only, or a combination of debt and equity financing. Firm L's financial manager decided to increase its use of debt financing because debt is the cheapest source of financing (b) Calculate the new ke of Firm L. (5 points) (c) Calculate the new kc of Firm L. (5 points) (d) Explain why the decision of Firm L's financial manager is flawed, (5 points) (e) Show that the new ki, of Firm I would have remained unchanged if the decision of the financial manager was to increase its use of equity financing. (5 points)

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