RRR Corporation has 100,000 shares outstanding with market value of $2 each. The market value...
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RRR Corporation has 100,000 shares outstanding with market value of $2 each. The market value of its debt is $120,000. Its equity beta is 0.96 while its debt is riskless. In a surprise move, RRR announces that it will raise another $40,000 of debt and use that to buy back some of its shares. The market value of the existing debt drops $118,000 after this announcement. The combined debt after the recapitalization will have beta of 0.1. The risk free rate is 3% and the market risk premium is 6%. There are no taxes. What is the cost of equity after (not before) the recapitalization? Is it more than, less than, or the same as the cost of equity before recapitalization? Why?
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