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The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is $500,000 and will not change if debt,
The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is $500,000 and will not change if debt, at any of the levels shown in the preceding table, is added to the firm's capital structure. North Star uses the CAPM to estimate its cost of common equity, . It estimates that the risk-free rate is 3.5%, the market risk premium is 4.5%, and its tax rate is 25%. North Star's current beta, which is because it has no debt, is 1.25. Calculate the firm's interest expense for each of the capital structures shown in the preceding table. (Wa) (W) (ra) EBIT Interest 0.00 1.00 5.0% 500.000 0.25 0.75 6.0 500,000 0.50 0.50 8.3 500,000 0.75 0.25 11.0 500,000
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