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Currently, Hotel California has no debt (i.e., leverage=0). The CEO of Hotel California considers increasing leverage (=debt/(debt+equity)) 0.8. Currently, Hotel Californias CAPM beta is 1.0.

Currently, Hotel California has no debt (i.e., leverage=0). The CEO of Hotel California considers increasing leverage (=debt/(debt+equity)) 0.8. Currently, Hotel Californias CAPM beta is 1.0. The cost of debt (R_D) will be 10%, risk free rate (R_F) is 1%, and market return (R_M) is 11%. Assume that the corporate tax rate () is ZERO. Your task, as the CFO of Hotel California, is to provide the cost of capital under this proposed capital structure (i.e., 80% leverage).

What is the weighted average cost of capital under the proposed capital structure (i.e., 80% leverage)?

A. 16.9%

B. 17.5%

C. 18.2%

D. 19.4%

E. 20.1%

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