The company Youphone is expected to generate $48 million in FCFF next year. The firm currently is extremely over-levered with a debt to equity ratio of 4:1. The beta of the stock is now 2.72 and the pre-tax cost of debt is 12%. The marginal tax rate is 40%, the risk free rate is 4% and the market risk premium is 6%. You believe that new management can turn the firm around by restructuring the firms financing mix, to make it 50% debt and 50% equity. That will reduce the pre-tax cost of debt to 8%. The firm is expected to have a 2% perpetual growth rate.

What would be the new cost of equity under the new financial structure? a. 19.44% b. 6.24% c. 11.68% d. 10.24% e. None of the other answers.