PG Inc has historically maintained a debt-equity ratio of approximately 0.20. Its current stock price is $50 per share with 2.5 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.5 and can borrow at 4.2%, just 20 basis points over the risk-free rate of 4%. The expected market risk-premium (rm-rf) is 6% and PGs tax rate is 35%. This year, PG is expected to have free cash flows of $6.0 billion and its cash flows are expected to grow at a constant rate of 2.6%. PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.5, it believes its borrowing costs will rise only slightly to 4.5%. PG announces that it will raise additional debt so as to increase its debt-equity ratio to 0.5 and pay the proceeds out to shareholders as dividends. What is PG's WACC under the new capital structure?

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4% 5% 6%