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Lonestar Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, before tax cost of debt is currently at 11%,
Lonestar Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, before tax cost of debt is currently at 11%, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and she is considering moving to a capital structure with 25% debt and 75% equity with before tax cost of debt 6%. The risk-free rate is 5.0% and the market risk premium is 8%. By how much would the weighted average cost of capital change due to this shift in capital structure? (6 points)
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