Arios Software is a small software company with 60 million shares outstanding, trading at $10 a share, and $400 million in debt. You have estimated a regression beta of 1.82 for the firm using the last 5 years of data, during which period the firm had an average debt to equity ratio of 50%. Arios can borrow money at 5%. The risk-free rate is 4% and the market risk premium is 3%. The tax rate for the company is 40%.

a. Assuming that the regression beta is correct, estimate the cost of capital (WACC) today, given the firm's current debt to equity ratio.

b. Now assume that Arios Software is awarded a court judgment of 1 billion from Microsoft for violation of software copyrights. Arios plans to use this money to pay a dividend of $250 million, pay off $250 million of debt and use the balance to invest in the computer hardware business. If the unlevered beta for computer hardware companies is 1.10, estimate the cost of capital (WACC) for Arios after these transactions. (Hint: draw a market-value balance sheet)