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5. Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT $400,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes,
5. Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT $400,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes, debt would be issued to repurchase stock. Debt Percent (Wa) Equity Percent (W) Before-tax cost of debt (ra) 0.10 0.90 6.0% 0.20 0.80 6.4 0.30 0.70 7.0 0.40 0.60 7.6 The company uses the CAPM to estimate its cost of common equity. The risk-free rate is 3 percent and the market risk premium is 5 percent. Its "unlevered beta," bu, equals 1.2. What is the company's optimal capital structure, and what is the firm's cost of capital and the stock price at this optimal capital structure
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