Problem
Duques Corp. is 100% equity financed. Its cost of equity is 12%. The firm plans to issue bond to repurchase 40% of its shares. The firm's investment bankers have informed her that since the new issue of bond is risky, bond holders will demand 6%, which is 2% above the risk-free rate. The beta of unlevered stock is 1.0.
i. Calculate the new company cost of capital.
ii. Calculate the new cost of equity.
iii. Calculate the new asset beta (βA), the bond beta (βD) and the new equity beta (βE).