Westwood Ltd.'s capital structure consists of 500,000 common shares, which have a

current market price of $25 per share. The underwriter has informed management

that the firm's weighted average cost of capital (WACC) could be significantly

reduced if it issues $2.5 million of long-term debt and uses the proceeds to purchase

and then retire 100,000 common shares. If Westwood undertakes this proposal to

alter its capital structure, which of the following statements about the impact on the

cost of common equity is true?

a) There is insufficient information to determine the impact of the change in capital

structure on the cost of common equity.

b) The cost of common equity will decrease.

c) The cost of common equity will remain unchanged.

d) The cost of common equity will increase.