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ABC Enterprises is currently an all-equity fim with an expected retum of 12%. It is considering borrowing money to buy back some of its existing
ABC Enterprises is currently an all-equity fim with an expected retum of 12%. It is considering borrowing money to buy back some of its existing shares. Assume perfect capital markets and answer the following questions. a. Suppose ABC borrows to the point that its debt-equity ratio is 1. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? O A 18.1% OB. 21.4% OC. 20% OD 16.4% Suppose instead ABC borrows to the point that its debt-equity ratio is 2. With this amount of debt, ABC's debt will be much riskler. As a result, the debt cost of capital will be 8%. What will be the expected return of equity in this case? O A. 23.4% OB 20% OC 33.5% OD 24.5% What is a cost of adding leverage to a company that only finances itself with equity? O A. An increase in equity-debt holder conflicts OB. An increase in financial distress costs O c. All answer choices are costs adding leverage to a company OD. An increase in the cost of equity
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