US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%, and its tax rate is 25%. It currently has a levered beta of 1.15. 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 8%.

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?

-10.78%

-9.80%

-7.35%

-6.37%