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A firm operating in perfect capital markets has a capital structure consisting of debt (10%) and equity (90%). The cost of debt is 4% and

A firm operating in perfect capital markets has a capital structure consisting of debt (10%) and equity (90%). The cost of debt is 4% and the cost of equity is 14%. The firm plans to issue additional bonds to retire some of its stock so that the new capital structure consists of 20% debt and 80% equity. After these changes take affect, the firm's cost of equity will be 15.25%.

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