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An unlevered firm has an EBIT of $4 million, which is expected to remain constant indefinitely. Its cost of capital is 15%. There is an
An unlevered firm has an EBIT of $4 million, which is expected to remain constant indefinitely. Its cost of capital is 15%. There is an identical levered firm which has $5 million of debt outstanding with a cost of debt of 5%. Using this information, what is the difference between the unlevered cost of equity (ro) and the levered cost of equity (rs)? That is, what is the financial leverage risk premium? Your answer should be a positive number. Assume that there are no corporate taxes.
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