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Q1. SAG Company is financed entirely by common stock. The firm pays no taxes. The stock is priced to offer a 10% expected return (i.e.,
Q1. SAG Company is financed entirely by common stock. The firm pays no taxes. The stock is priced to offer a 10% expected return (i.e., unlevered rate of return). The company decides to repurchase half of the common stock and substitute with an equal value of debt. The debt yields a risk-free rate of 5%. What is the required return on common stock after the refinancing (i.e., in the levered firm)? What is the required return on the company after the refinancing, i.e., weighted average cost of capital
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