Babbio Corp. has always been all-equity until recently it never expected to raise any debt....
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Babbio Corp. has always been all-equity until recently it never expected to raise any debt. That partly explained why its cost of equity was 3 percent lower than its competitors average cost of equity of 16%. In a surprise move today, the firm has announced that it will recapitalize by raising debt and using the cash proceeds to buy back shares. It will achieve a debt-equity ratio of 20%:80% and will maintain this ratio in the future. The corporate tax rate is 20%. The cost of debt is 6%. What will be the new cost of equity after the change of capital structure?
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