A company has a debt-equity ratio currently at 0.5 Its Assets are 18,000 Its Debt is 6,000 Its Equity is 12,000 The beta of the assets is 1.5. The risk-free rate is 3% and the average return on the market index is 7%. The cost of equity cap is 9%. The cost of debt capital is 3.5% and the WACC is 7.166%

A) Assuming that Modigliani-Miller irrelevance of borrowing policy holds, what would the cost of equity be if the debt-equity ratio increases to 1.0? You should assume that the increase in borrowing increases the cost of borrowing to 3.6%. B) Explain the trade-off theory of borrowing. C) Assume that the debt-equity ratio has been raised to 1.0. Modigliani-Miller irrelevance of borrowing does not hold, so the increase in borrowing will increase both the PV of the corporate tax shield of borrowing and the PV of the expected bankruptcy costs. The PV of the tax shield is 0.6bn and the PV of the bankruptcy costs is 0.1bn. The cost of debt capital is 3.6%. Assuming that both the PV of the tax shield and the PV of the bankruptcy costs have a beta of 1.5, what is the new WACC and the new cost of equity capital?