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Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 49.0% debt (w d ) by issuing bonds

Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 49.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (wc) = 1 wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU? Do not round your intermediate calculations.

Risk-free rate, rRF 6.00% Tax rate, T 40%
Market risk prem, RPM 3.00% Current wd 0%
Current beta, bU 1.30 Target wd 49.0%
a. 1.57%
b. 2.59%
c. 1.91%
d. 2.25%
e. 2.92%

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