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    The cost of equity

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    A firm finance completely with equity currently has a cost of capital equal to 15 percent. If Modigliani and Miller's Proposition 1 holds and the firm is thinking about its capital structure to 50 percent debt and 50 percent equity, then what will be the cost of equity after the change if the cost of debt is 10 percent?

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    Under MM proposition I (without taxes)
    Levered cost of equity rs = r0 + ...

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    The cost of equity is demonstrated in this solution.