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Company Z has a capital structure consisting of 20% debt and 80% equity. Its bond has a YTM of 7%. The risk-free rate is 6%,
Company Z has a capital structure consisting of 20% debt and 80% equity. Its bond has a YTM of 7%. The risk-free rate is 6%, and long term market return is 12%. Beta was estimated at 0.9, and the company tax rate is 20%. This is the base case scenario. Consider Scenario A in which Company X takes on more debt at a cost of 7.5% to take advantage of more tax shield. The resulting capital structure would be 50% debt and 50% equity. What is WACC for scenario A?
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