DuPont is considering what its debt capacity is. In March 2015, DuPont had an outstanding market value of equity of $24.27 billion, debt of $2.8 billion and a AAA rating. Its beta was 1.47 and it faced a marginal corporate tax rate of 40%. The market risk premium is 5.5%. The Treasury bond rate (e.g., the risk-free rate) at the time of the analysis was 6.50% and AAA bonds trade at a spread of 0.30% over the Treasury rate.

a) Estimate the current cost of capital for DuPont.

b) It is estimated that DuPonts credit rating would decrease to a BBB if the company moves to a 30% debt ratio and that BBB bonds have a spread of 2% over the treasury rate. Estimate the cost of capital if DuPont moves to this optimal debt level

c) Suppose DuPont has considerable research and development expenses. How, if at all, will this affect whether DuPont takes on the additional debt?