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Paranoid Corp. has no debt and the market value of its equity is $10 million. Its cost of equity is currently 12%. The firm plans

Paranoid Corp. has no debt and the market value of its equity is $10 million. Its cost of equity is currently 12%. The firm plans to issue $5 million of perpetual debt at 4% interest rate. The proceeds will be used to repurchase an equal value of equity shares. The tax rate is 0. What will be the new cost of equity?

15.4%

20.0%

16.7%

18.0%

16.0%

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