Digital Organics is all-equity-financed. The expected rate of return on the companys shares is 13.75%. Suppose the company plans issues debt, repurchases shares, and moves to a 31% debt-to-value ratio (D/V = 0.31). Assume the cost of debt is 9.25% and the tax rate is 21%.

1. What will be the companys weighted-average cost of capital at the new capital structure?

2. Should the company borrow as planned and why?