Problem 2.4. Babbio Corp. has always been all-equity and until recently it never expected to raise any debt. That partly explained why its cost of equity was 3 percent lower than its competitors' average cost of equity of 16%. 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 will maintain this ratio in future. The