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Question $5$: Ungearing and re$-$gearing the beta factors$-$Pure

playmechanism

The capital structure of Smog Inc. consists of

Additional Information

The current market price of a bond is $$816\mathrm{.}67$

Smog's common stock sells at $$22\mathrm{.}75$ each

The market portfolio return is $11\%.$ Interest rate on treasury

bonds is $4\%$ and beta is $1\mathrm{.}53$

The company wants to borrow more debt which will increase

the gearing $($debt to equity ratio$)$ to $1$:$1$ but will not affect the

stock price due to increased tax shield. Tax rate is $30\%.$

Required

a$)$ Compute the capital structure weights

b$)$ What is the current cost of equity, $Ke$ and cost of debt,

T$)?$

c$)$ Compute WACC

d$)$ Compute the firm's unlevered beta?

e$)$ What is the firm's new cost of equity with the additional

borrowing?