Determine the cost of equity, Financial Accounting

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Lockheed Martin's management wishes to find out whether they have excess debt capacity. Its current market value of equity is $40 b and its book value of debt is $ 4b. The company's EBIT last year was about $4b. The current beta of the company's stock is 0.5, marginal tax rate is 30%. Assume that current five-year

Treasuries yield 2.0% and ten-year Treasuries yields 3.0%. For cost of equity calculation, assume that risk-free rate is 3% and market risk-premium is 4%. Using the table below as broad guidelines, will the firm minimize WACC at no debt, current level of debt, 25% debt, or 50% debt? Explain all your steps in the calculation. As in the examples we did in class, assume that the firm size will remain the same under all scenarios (Debt issued will be used to repurchase shares).

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