Consider this case:

Globex Corp. currently has a capital structure consisting of $35\%$ debt and $65\%$ equity. However, Globex Corp.$$s CFO has suggested that the firm increase its debt ratio to $50\%.$ The current risk$-$free rate is $2\mathrm{.}5\%,$ the market risk premium is $7\%,$ and Globex Corp.$$s beta is $1\mathrm{.}25.$

If the firm$$s tax rate is $45\%,$ what will be the beta of an all$-$equity firm if its operations were exactly the same?

Now consider the case of another company:

US Robotics Inc. has a current capital structure of $30\%$ debt and $70\%$ equity. Its current before$-$tax cost of debt is $6\%,$ and its tax rate is $45\%.$ It currently has a levered beta of $1\mathrm{.}25.$ The risk$-$free rate is $2\mathrm{.}5\%,$ and the risk premium on the market is $7\%.$ US Robotics Inc. is considering changing its capital structure to $60\%$ debt and $40\%$ equity. Increasing the firm$$s level of debt will cause its before$-$tax cost of debt to increase to $8\%.$

First, solve for US Robotics Inc.$$s unlevered beta.

Use US Robotics Inc.$$s unlevered beta to solve for the firm$$s levered beta with the new capital structure.

Use US Robotics Inc.$$s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure.

What will the firm$$s weighted average cost of capital $($WACC$)$ be if it makes this change in its capital structure?

$8\mathrm{.}8\%$

$7\mathrm{.}0\%$

$7\mathrm{.}5\%$

$6\mathrm{.}2\%$