Question: 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

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?

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