XYZ Corp. has a market debt-equity ratio of 0.50. Its current debt cost of capital is 6.5%, and its current equity cost of capital is 14%. XYZ issues equity and uses the proceeds to repay its debt. As a result, its debt-equity ratio reduces to 0.40 and it is able to lower its debt cost of capital to 5.75%. Assume perfect capital markets.

a) Compute XYZs equity cost of capital after XYZ issues equity and uses the proceeds to repay its debt.

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