Balance Sheet Information
Book Debt	$25 billion
Book Equity	$27 billion
Total Book Assets	$107 billion

Stock Price Information
Price per share	$12.50
Shares Outstanding	2 billion
Equity beta	1.4

Assume a risk-free rate of 2% and a market risk premium (E(r_M-r_F)) of 5%

The yield to maturity on HPQs long-term debt is 3%

Assume a 40% tax rate

Suppose ABC plans to issue $5 billion in new equity capital (i.e., stock) and use the proceeds to decrease their debt by $5 billion (i.e., to a total debt of $20 billion). They estimate that this change in financial structure will not materially affect their cost of debt.

What would be their unlevered asset cost of capital (r_U) after the change in financial structure?

a. 5.0% b. 5.5% c. 6.0% d. 6.5% e. 7.0%

What would be their cost of equity (r_E) after the change in financial structure?

a. 8.0% b. 8.5% c. 9.0% d. 9.5% e. 10.0%