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Problem - Lighter Industrial Corporation (LIC) is considering a large-scale recapitalization. Currently, LIC is financed with 25% debt and 75% equity. LIC is considering increasing its level of debt until it is financed with 60% debt and 40% equity. The beta on its common stock at the current level of debt is 1.5, the risk-free rate is 6%, the market risk premium is 4%, and LIC faces a 25% federal-plus-state tax rate.
a. What is LIC's current cost of equity?
b. What is LIC's unlevered beta?
c. What will be the new beta and new cost of equity if LIC recapitalizes?
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