US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 45%. It currently has a levered beta of 1.10. The risk-free rate is 2.5%, and the risk premium on the market is 7%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firms level of debt will cause its before-tax cost of debt to increase to 10%.

First, solve for US Robotics Inc.s unlevered beta.

.89

.80

1.07

.98

Now, Use US Robotics Inc.s unlevered beta to solve for the firms levered beta with the new capital structure:

1.54

1,62

1.78

1.46

Now, Use US Robotics Inc.s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure:

11%

12.4%

13.8%

15.9%

What will the firms weighted average cost of capital (WACC) be if it makes this change in its capital structure?

8.8%

7.5%

9.7%

5.7%