UNLEV Has an Expected Perpetual EBIT = $4,000

Multiple Choice

UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

What is UNLEV's cost of equity after the restructuring?

A) 14.8%
B) 17.5%
C) 18.4%
D) 20.0%
E) 22.5%