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What will the expected return of equity be in this case

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Question - Hardmon Enterprises is currently an all-equity firm with an expected return of 14%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.

Suppose instead Hardmon borrows to the point that its debt-equity ratio is 2.00. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 8%. What will the expected return of equity be in this case?

Reference no: EM132988174

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