B. Falcons financial staff considers changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 10.5%. The proposed change will not affect the companys tax rate.

1. What would be the companys new cost of equity if it adopted the proposed change in the capital structure?

2. What would be the companys new WACC if it adopted the proposed change in the capital structure?

3. Based on your analyses to question 6, would you advise Falcons board to adopt the proposed change in the capital structure? Explain.