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New cost of equity after the recapitalization

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MM Corp. has 50,000 shares outstanding with share price of $18. It has debt with market value of $300,000. The equity beta is 1.2 and debt beta is 0.1. The risk-free rate is 2% and the market risk premium is 6%. There are no corporate taxes. The firmmakes a surprise announcement to issue additional shares for $100,000 and use the proceeds to buy back debt. Assume that the risk and the market value of the debt are unaffected bythe announcement. What will be the new cost of equity after the recapitalization? Does it increase, decrease, or remain unchanged after recapitalization? Why?

Reference no: EM133062454

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