Gray Corp. has always been all-equity and until recently it never expected toraise any debt. In a surprise move today, the firm has announced that it will recapitalize byraising debt and using the cash proceeds to buy back shares. It will achieve a debt-equity ratioof 10%:90% and then adjust capital structure to maintain this ratio in future. The firm'scost of equity was 15% before the surprise announcement. The corporate tax rate is 20%.The cost of debt will be 4%. What will be the new cost of equity after the change of capitalstructure?

Answer rating: 100% (QA)

To calculate the new cost of equity we need to first calculate the new weighted average cost o... View the full answer