Q Magnetic materials is an unlevered firm. Its current beta is 1.2. The expected market rate of return is 15 % and the risk free rate is 8%. MM is considering two other capital structure policies in addition the current one. The first alternative would use 20% debt at an after tax cost of 9%, which will increase its beta to 1.4. The second alternative would use 40% debt at an after tax cost of 9 .6%, which will increase beta to 1.6. Which of the three capital structures should MM adopt?
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