Perez & Perez (P&P), based in a country currently without any taxes, has an annual operating income (EBIT) of 3 million in perpetuity. The company is currently 100 percent equity financed and, based on its current capital structure, its shareholders have a required rate of return of 12 percent. P&P is considering issuing 10 million in debt and using the proceeds to repurchase common shares. The debt will be issued at par and will have an 8.0 percent coupon. Assuming Modigliani and Miller's Proposition II applies, P&P's cost of equity after the company issues debt and repurchases shares will be closest to:

	12.0 percent.
	14.7 percent.
	10.4 percent.