Safety Systems owns and operates a fire extinguisher manufacturing firm. The firm currently has $50 million in debt and $100 million in equity outstanding. Its stock has a beta of 1.2. The firm is planning a leveraged buyout, where it will increase its debt to equity ratio to .80. The tax rate is 25%.

The calculations determine that the unlevered beta of the firm is .8727 and the new beta after the leverage buyout is 1.37.

Explain the likely effect on both the component cost of equity capital and the firms overall weighted average cost of capital. Why would a firm pursue such a strategy?