Question: Gray Corp. has always been all-equity and until recently it never expected to raise any debt. In a surprise move today, the firm has announced

Gray Corp. has always been all-equity and until recently it never expected to raise any debt. In a surprise move today, the firm has announced that it will recapitalize by raising debt and using the cash proceeds to buy back shares. It will achieve a debt-equity ratio of 20%:80% and then adjust capital structure to maintain this ratio in future. The firms cost of equity was 12% before the surprise announcement. The corporate tax rate is 20%. The cost of debt will be 5%. What will be the new cost of equity after the change of capital structure?

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