3. Suppose that XY2 Corp. is currently an unlevered firm with 12% cost of equity. XYZ Corp. is
considering borrowing funds at a cost of 6% and using these funds to repurchase existing stocks.
Assuming perfect capital markets, if XYZ Corp. borrows until it achieves a debt-to-asset ratio of 40%,
then what is its levered cost of equity?
(A)15.6%
(B)9.6%
(C) 12.0%
(D)14.4%
(E)16.0%
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