As a firm takes on more debt, its probability of bankruptcy faces a chance of bankruptcy. Therefore, whe debt than a more stable firm. When bankruptcy cost Other factors held constant, a firm whose earnings are relatively volatile rs are held constant, a firm whose earnings are relatively volatile should use re important, they the tax benefits of debt. increases decreases Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.15, and its cost of equity is 11.55%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.55%. The risk-free rate of interest (PRF) is 3.5%, and the market risk premium (RPM) is 7%. Blue Ram's marginal tax rate is 25%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Bond Before-Tax Cost of D/Cap Ratio E/Cap Ratio Levered Beta (b) Cost of Equity ( rs) D/E Ratio Rating Debt (ra) WACC 0.0 1.0 0.00 1.15 11.55% 11.55% 0.2 0.8 0.25 A 7.2% 13.062% 11.530% 0.4 0.6 0.67 BBB 7.7% 1.725 15.575% 0.6 0.4 1.50 BB 8.9% 2.444 12.248% 0.8 0.2 C 11.9% 4.600 35.700%