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A firm currently has a debt-equity ratio of 1/3. The debt, which is virtually riskless, pays an interest rate of 6.4%. The expected rate of

A firm currently has a debt-equity ratio of 1/3. The debt, which is virtually riskless, pays an interest rate of 6.4%. The expected rate of return on the equity is 12%. What would be the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/4? Assume the firm pays no taxes.

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