Hele Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5% and the risk-free rate is 4.2%. If Hele changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Hele make the capital structure change?

Yes, cost of capital decreases by 2.52%

Yes, cost of capital decreases 1.67%

No, stock price would decrease due to increased risk

No, cost of capital increases by 0.85%