Until now, Delaware East, Inc.has been an all-equity firm; its most recent market equity value was $80 mn., and its cost of equity (and cost of assets) is 15%.Now, the firm decides to increase its leverage by issuing $40 mn.in debt, with the proceeds being used to pay a dividend to shareholders.The cost of the debt is r_D=7%.What is the firm's new cost of equity capital, according to Modigliani and Miller's Proposition II?

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The Answer of Until now, Delaware East, Inc.has been an all-equity firm; its most recent market equity value was $80 mn., and its cost of equity (and cost of assets) is 15%.Now, the firm decides to increase its leverage by issuing $40 mn.in debt, with the proceeds being used to pay a dividend to shareholders.The cost of the debt is r_D=7%.What is the firm's new cost of equity capital, according to Modigliani and Miller's Proposition II?

Until Now, Delaware East, Inc