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QUESTION

Can I get help on the below question?

Can I get help on the below question? I'm not sure if I'm doing it right. Please provide equations so I can follow the logic.

Cars Corporation currently has 15% debt in its capital structure; however, its new CFO is considering changing the capital structure to 30% debt. The company has 4% annual coupon bonds outstanding that have a before-tax yield to maturity of 6%. Additional financial information is given below.

Risk-free rate, rRF                               2.50%             Tax rate, T                  25%

Market risk premium (rM - rRF)         5.00%             Current beta, bL         1.1

a.     What is the company's WACC at its existing 15% debt ratio? 

b.     What would be the company's levered beta if it increased its debt ratio to 30%? Carry your answer out to 4 decimal places.  

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