Snowstorm Inc. expects its EBIT to be $300,000 every year forever. The firm can borrow at 10%. The firm currently has no debt, and its cost of equity is 12%. The tax rate is 40%. The firm is thinking of borrowing $340,000 and using the proceeds to buy back shares.

a) Pretend the debt/equity ratio is 0.30. What would be the cost of equity for this firm after the recapitalization?

Answer is 12% - need in-depth solution.