Question
Gray Corp. has always been all-equity and until recently it never expected to raise any debt. In a surprise move today, the firm has announced
Gray Corp. has always been all-equity and until recently it never expected to raise any debt. In a surprise move today, the firm has announced that it will recapitalize by raising debt and using the cash proceeds to buy back shares. It will achieve a debt-equity ratio of 20%:80% and then adjust capital structure to maintain this ratio in future. The firms cost of equity was 12% before the surprise announcement. The corporate tax rate is 20%. The cost of debt will be 5%. What will be the new cost of equity after the change of capital structure?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started