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Question 3 (20 marks) (a) Elzear & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. Elzear

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Question 3 (20 marks) (a) Elzear \& Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. Elzear currently has no debt, and its cost of equity is 12 percent and the tax rate is 35 percent. The company borrows $125,000 and uses the proceeds to repurchase shares. What is the cost of equity of the firm after recapitalization? (10 marks)

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