The unlevered cost of capital for convenience stores is 16%. You are about to open a chain of convenience storeswith a debt to equity ratio of 1.5, a cost of debt of 4%, and a tax rate of 26%.

a. What is your levered cost of equity?

b. What is your weighted average cost of capital?

c. Your tax rate drops from 26% to 20%. What does the tradeoff theory of capital structure suggest should happen to your debt to equity ratio?

d. Your firm announces that it is going to lower its debt to equity ratio. According to the pecking order theory of capital structure, will investors see this as good or bad news? Why?