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Suppose Bilmo Co has a levered equity beta of 1.3 and a debt-equity ratio of 1. Bilmo now wants to increase its leverage so that

Suppose Bilmo Co has a levered equity beta of 1.3 and a debt-equity ratio of 1. Bilmo now wants to increase its leverage so that its debt-equity ratio is actively targeted at 2.2. The debt beta is estimated to be 0.28 in both old and new leverage levels. The risk-free rate is 1% and the expected market portfolio return 6%. Bilmo corporate tax rate is 20%.

a. What is Bilmo's cost of levered equity?

b. What is Bilmo's cost of unlevered equity?

c. What is the Bilmo WACC after the releveraging?

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