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River Island has a debt-equity ratio of 2.0. The firm's weighted average cost of capital is 12%, and its pre-tax cost of debt is 8%.

River Island has a debt-equity ratio of 2.0. The firm's weighted average cost of capital is 12%, and its pre-tax cost of debt is 8%. River Island is subject to a corporate tax rate of 30%. Explain how increasing debt in capital structure will affect WACC. What would River Island's weighted average cost of capital be if the firm's debt-equity ratio were 0.8?

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