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Your company is currently 100 percent equity financed. The CFO is considering a recapitalization plan under...

Your company is currently 100 percent equity financed. The CFO is considering a recapitalization plan under which the company would issue long-term debt at a yield of 8 percent and use the proceeds to repurchase 25 percent of its common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power (that is. EBIT/assets), which is 20 percent or its operating expenses. The company currently pays taxes at a combined marginal rate of 27 percent. Explain how the recapitalization is likely to affect (increase. decrease no effect, indeterminate the company's net income, return on equity, and WACC.

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