Problem:
Air Seattle is looking to change its capital structure from an all-equity firm to a leveraged firm with 60% debt and 40% equity. Air Seattle is a not-for-profit company and therefore pays no taxes.
Required:
Question: If the required rate on the assets of Air Seattle is 21%, what is the current required cost of equity (when Air Seattle is an all-equity firm)? What is the new required cost of equity if the cost of debt is 8%?
Note: Please provide reasons to support your answer.