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An all-equity company is considering borrowing funds and using the proceeds to repurchase shares resulting in a D/E ratio of 1.1 for the company. The
An all-equity company is considering borrowing funds and using the proceeds to repurchase shares resulting in a D/E ratio of 1.1 for the company. The company can borrow at 4% and its current cost of equity is 11%. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied except the company's corporate tax rate is 20%. If the company proceeds with the capital restructuring, what will be the company's cost of equity according to M&M Proposition I with taxes?
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