Honeywell International Inc. (HON) has a market debt-equity ratio of 0.5. Assume its current debt cost of capital is 6.5%, and its equity cost of capital is 14%. If HON issues equity and uses the proceeds to repay its debt and reduce its debt-equity ratio to 0.2, it will lower its debt cost of capital to 5 %.

a. With perfect capital markets, what effect will this transaction have on HONs equity cost of capital?

b. What effect will this transaction have on HONs WACC?