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Assume the M&M assumptions with taxes hold, i.e. no default risk, no agency conflicts. The...

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Finance

Assume the M&M assumptions with taxes hold, i.e. no default risk, no agency conflicts. The corporate tax rate is equal to 30%. Consider two firms U and L that only differ in terms of their capital structure: U is all-equity financed, while L is levered with D/E=2. Assume that U generates FCFF=100 per year forever at a cost of capital of 10% and that L's firm value is given by V(L)=1,250. The risk-free rate is equal to 2%.

What is L's cost of equity?

Group of answer choices

10%

23.1%

15.6%

12.3%

21.2%

Answer & Explanation Solved by verified expert
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