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A company has an equity beta of 1.875, the expected market risk premium is 8% and the risk free rate is 10%. a. What is

A company has an equity beta of 1.875, the expected market risk premium is 8% and the risk free rate is 10%.

a. What is the expected rE?

b. What is the expected rE if the company changes it's level of gearing from it's current level (D:E) of 1:3 to 1:2. The company's cost of debt is 10% and the tax rate is 35%.

[Hint: assume debt beta =0]

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