Westhead Clinics produces $400,000 of cash flow each year. The company has no debt outstanding, and its
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Westhead Clinics produces $400,000 of cash flow each year. The company has no debt outstanding, and its cost of equity capital is 26 per cent. The company would like to buy-back $700,000 of its equity by borrowing a similar amount at a rate of 10 per cent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Westhead after it changes its capital structure. Assume that Modigliani and Miller Proposition 1 hold.
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