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Blue Lagoon Ltd is an unlevered firm with a cost of equity of 4 % and a tax rate of 3 5 % . Required:

Blue Lagoon Ltd is an unlevered firm with a cost of equity of 4% and a tax rate of 35%.
Required:
i) Using Modigliani and Miller's theory with corporate taxes (but no bankruptcy costs), calculate the cost of equity of a levered firm in the same tax bracket that pays interest at 2% and has a debt to equity ratio of 65%.
ii) Explain (with calculations) what would happen to the cost of equity of the levered firm if the debt to equity ratio was reduced to 20%
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