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3. The firm is currently an all-equity firm with an expected return of 12% (which is also the firms WACC since the firm is 100%
3. The firm is currently an all-equity firm with an expected return of 12% (which is also the firms WACC since the firm is 100% equity). It is considering an increase in leverage in which it would borrow and repurchase existing shares. If the firm borrows to the point that its debt-equity ratio is 1.5. With this amount of debt, the debt cost of capital is 6%. The firms marginal corporate tax is 21%, what will the equity cost of capital be after this transaction? A) 9% B) 12% C) 21% D) 19.11% E) 22.89%
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