David Co. currently finances with 20.0% debt (wd)., but the new CEO wants to change the capital structure so that wd=60.0% by issuing additional bonds and using proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure wc=1-wd.

Given data shown, How much would this recapitalization change the firms cost of equity? (unlever current beta and then use the unlevered beta to solve problem)

Risk free Rate = 3.00%

Market Risk Premium = 6.00%

Current beta = 1.15

Tax Rate = 40%

Current Capital Structure: 20% Debt/ 80% Equity

Target Capital Structure: 505 Debt/ 50% Equity

(Multiple Choice):

3.45%

4.50%

3.95%

2.70%

5.99%