modigliani and miller example question solving problem

Hi dear tutor ,
One question and answer is bothering me so maybe you can help me to fully understand the answer and concepts behind it , it goes like this :

Canalot plc is all equity company with an equilibrium market value of 32,5 million and a cost of capital of 18% per year .
The company propose to repurchase $5 million of equity and to replace it with 13% irredeemable bonds
Canalot`s earnings before interest and tax are expected to be constant for foreseeable future .Corporate tax is at the rate of 35% .all profits are paid out as dividends.

Required:
Use the assumptions of Modigliani and Miller to explain and demonstrate how change in the capital structure of Canalot plc will affect
1)The market value
2)the cost of equity
3)the cost of capital

Part that I don`t understand is calculation of the cost of equity , I just cant remember studying this formula :Keg=Keu+(Keu-Kd) * ( D(1-t)/E)

solution > Keg=Keu+(Keu-Kd) * ( D(1-t)/E)

=0.18+(0.18-0.13)*(5(1-0.35)/32.5-5+1.75)

=0.18+(0.05*3.25/29.25)

=0.1856 i.e. 18.56

Thanks