PrivateEq is a PE fund that is considering buying out QuickGas, a chain of gas stations. To get an estimate of QuickGas's cost of capital, it estimates the equity beta of a portfolio of publicly-traded gas station chains, which it finds to be 1.3. Gas station chains have significant leverage: the debt-to-equity ratio of the portfolio is 1. Moreover, the beta of this debt is 0.3. The risk-free rate is 3% and the market risk premium is 8%. The corporate tax rate is 35%.

(a) Assuming that the gas station chains maintain a constant D/E ratio, what is their unlevered beta?

(b) Suppose PrivateEq plans to run QuickGas with a constant D/E ratio of 3 /2. Assuming QuickGas's debt beta will increase to 0.4, what will QuickGas's WACC be?

(c) Suppose PrivateEq instead plans to maintain a fixed, perpetual level of debt on QuickGas's balance sheet with the level of debt set so that initially the debt-equity ratio is D0 /E0 = 3/2 (debt will then remain constant even as the equity value fluctuates). Under this scenario, what will be QuickGas's WACC?