Question 1 Cost of Capital in Perfect MarketsCurrently, ABCCorp. has as market capitalization of $400 million and a market value of debt of $150 million. The current cost of equity for ABC Corp. is 12% and its current cost of debt is 5%. Assume perfect capital markets (no taxes, no market frictions).You are trying to assess how different transaction would affect the cost of equity.

A)Suppose ABC issues$150 million of new equity and buys back the debtit currently has outstanding. What is ABCscost of equity after this transaction?

B)Suppose ABC issuesan additional $150 million of new debt and pays its shareholders a dividend(so total debt after this transaction is $300mn). Assuming its cost of debt remains at 5%, what is ABCscost of equity after this transaction?