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Alpha Corp is an all-equity firm. Its shares have an expected return of 10%. Alpha decides to undertake a leveraged recapitalization. To this end, it
Alpha Corp is an all-equity firm. Its shares have an expected return of 10%. Alpha decides to undertake a leveraged recapitalization. To this end, it decides to issue debt and buy back stocks, until its debt-equity ratio becomes 0.60. Due to the significant increase in financial risk, shareholders now require a rate of return of 13%.
Assuming there are no taxes and Alpha's debt is risk-free, what is the interest rate on the debt issued?
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