The Problem

After completing her estimate of Templeton's WACC, the CFO decided to explore the possibility of adding more lowcost debt to the capital structure. With the help of the firm's investment banker, the CFO learned that Templeton could probably push its use of debt to $37\mathrm{.}5\%$ of the firm's capital structure by issuing more debt and retiring $($purchasing$)$ the firm's preferred shares. This could be done without increasing the firm's costs of borrowing or the required rate of return demanded by the firm's common stockholders. What is your estimate of the WACC for Templeton under this new capital structure proposal?