Rotman Inc Rotman Inc. is a publicly traded company that is considering a restructuring plan. The company currently has

$80$ million shares trading at $$10/$share and total debt outstanding of $$200$ million. The firm currently has a

$($levered$)$ beta of $1\mathrm{.}15,$ the risk free rate is $2\%,$ the equity risk premium is $6\%$ and the marginal tax rate is $40\%.$

a$)$ The firm is planning to double the weight of its dollar debt to the capital $($debt $+$ equity$)$ and use the

proceeds from the new debt to pay dividends & buy back stock. If the firm$$s bond rating will drop to BBB

with a default spread of $2\mathrm{.}5\%$ over the risk free rate, estimate the cost of capital after the recapitalization.

b$)$ You estimate that if the firm doubles the weight of its dollar debt to the capital, its firm value will increase

by $4\%.$ Estimate the pre$-$tax cost of debt that currently faces $($before recapitalization$),$ if the firm is mature

with no growth expected in perpetuit