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Question
Morales Publishing's tax rate is 40%, its beta is 1.10, and it uses no debt. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much would the capital structure shift change the firm's cost of equity?a. 1.53%
b. 1.70%
c. 1.87%
d. 2.05%
e. 2.26%
Answer
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