Miller, Inc. has no debt and its cost of equity is 12% (note: this is RA). Miller borrows at 5%. The corporate tax rate is 30%.

a) Use Miller and Modiglianis capital structure theory with taxes to calculate the cost of equity if Miller adds debt to their capital structure. They are considering a debt-to-equity ratio of 50% (this is D/E).

b) Next, calculate Millers cost of capital (WACC) associated with the proposed new debt-to-equity ratio. Note that the new debt ratio (wd) is 1/3 and the new equity ratio (ws) is 2/3.

c) Based on your result here, is your recommendation to Miller? Should they add debt to their capital structure? Explain.