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8) Assume that the un-levered beta for a firm is equal to 1.27, market risk premium is 9.55%, risk-free rate is 1.50%, determine the cost
8) Assume that the un-levered beta for a firm is equal to 1.27, market risk premium is 9.55%, risk-free rate is 1.50%, determine the cost of capital of this all equity firm. Assume then that the company adds debt such that the D/E ratio is equal to .50 and the cost of debt is 6.50%. Determine the cost of capital of this levered firm assuming the M&M model holds in a world of no corporate taxes. Please explain the empirical results.
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