T Corporation is considering a reduction in the corporations debt ratio. The following information is available:
Debt $10,000,000 kd=7.5%, tax rate = 30%
Common Stock $23,000,000 beta = 1.2, RF = 5%, E(rm) = 12%
The issuance of $5,000,000 in common equity and repurchase of debt in that same amount is expected to result in the reduction in kd to 7%. The impact of the action on the cost of equity is to be established. Should the mangement pursue this reduction in debt? Why (not) ?