Question
Zenor Corporation has 6,000 shares outstanding with market value of $25 each. The market value of its debt is $50,000. Its equity beta is 0.8
Zenor Corporation has 6,000 shares outstanding with market value of $25 each. The market value of its debt is $50,000. Its equity beta is 0.8 while its debt is riskless. In a surprise move, Zenor announces that it will raise another $50,000 of debt and use that to buy back some of its shares. Assume that the market value of the existing debt is not affected by this decision. The combined debt after the recapitalization will have beta of 0.1. The risk-free rate is 5% and the market risk premium is 5%. There are no taxes. What is the cost of equity after (not before) the recapitalization?
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