Satoshi Labs has 100 million shares outstanding, trading at $50/share. The company has no debt outstanding and no cash balance. Its stock has a beta of 0.90, the risk-free rate is 3% and the equity risk premium is 6%.

The company is in stable growth and is expected to generate free cash flows, prior to debt payments but after taxes and reinvestment needs, of $ 250 million next year.

Now assume that the company plans to permanently borrow $2 billion at a pre-tax cost of debt of 7% (assume debt has a beta equal to zero) and return the cash to equity investors in the form of a special dividend (the $2 billion is borrowed and paid out as a dividend). If the marginal tax rate is 40%, what effect will the borrowing have on the average cost of capital, assuming that your savings grow at the implied growth rate from part a?