JBL Industries is an all-equity financed corporation with a current 12% cost of capital and $200m market
capitalization (risk free rate is 5% and the company’s stock beta is 1). JBL business has become stable and the firm has been generating a stable stream of cash in recent years. 2) Management contemplates to replace 25% of the equity with debt through issuing risk-free debt and repurchasing stock. What would be the required return on equity after this change? Assume no taxes and efficient capital markets.
a. 14.33%
b. 12.00%
c. 13.75%
d. 19.00%
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