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Create Inc. has a cost of equity of 15% and no debt. The company is now borrowing money to repurchase its own shares. Assume perfect
Create Inc. has a cost of equity of 15% and no debt. The company is now borrowing money to repurchase its own shares. Assume perfect capital markets (no taxes).
Part 1: What is the new cost of equity if the company borrows to the point where its debt to equity ratio is 0.8, at an interest rate of 8%?
Part 2: Assume now that the company borrows to the point where its debt to equity ratio is 1.3 instead. Given that level of debt, its debt is now riskier and will require an interest rate of 10%. What is the new cost of equity?
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