Chelsea Corporation's cost of equity is 16% and it is 100% equity financed.If it can borrow enough money at 10% to buy back half of its shares,what would happen to the cost of equity under the original assumptions of the Modigliani and Miller Capital Structure Theorem?

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According to the Modigliani and Miller Theorem, when a firm increases its leverage, the cost of equity increases because equity holders require a higher return due to increased financial risk. With 50% debt at 10%, the cost of equity rises to 22%.

Chelsea Corporation's Cost of Equity Is 16% and It Is