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a) In a perfect capital market, explain what happens to the risk, expected return and value of levered equity if the firm replaces some its

a) In a perfect capital market, explain what happens to the risk, expected return and value of levered equity if the firm replaces some its debt with equity.

b) A firm has a market value of equity of 100 MSEK and debt of 40 MSEK. Its one-year ahead forecasted free cash flow of 7 MSEK is expected to grow at 3% forever. The cost of debt is 7.5% and the corporate tax rate is 35%. What is the value of the firms interest tax shield?

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