CITI Industries has a current capital structure consisting of 30% debt and 70% equity. Its debt currently has 7.2% yield to maturity. The risk-free rate is 5.5%, and the market risk premium is 6.5%. The estimated cost of equity is 12.4%. The company has a 30% tax rate.

1. What is the beta on CTEs common stock? What is the beta if the company has not debt in its capital structure?

2. If the company change its capital structure to 45% debt and 55% equity, and the yield to maturity on the companys bond rise to 8%. The tax rate remains at 25%. What is the new WACC?

3. Based on your answer to question 2, would you advise CTE to adopt the proposed change in capital structure?

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