US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, 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 12%.

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

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

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

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

10.20%

9.60%

12.00%

8.40%