You are trying to analyze the optimal debt ratio for Motel 19, a firm that owns and operates a number of motels all over the country. The firm has 50 million shares trading at $10 a share and a $125 million in debt outstanding (in market value terms). The current levered beta for the firm is 0.90 and the pre-tax cost of borrowing is 7%. The risk-free rate is 5% and the market risk premium is 4%. (Corporate tax rate = 40%)

a) Estimate the current cost of capital for Motel 19

b) The firm is planning to triple its dollar debt and use the proceeds to buy back stock. If it does so, it believes that its pre-tax of borrowing will rise to 8%. Estimate the new cost of capital for Motel 19, if it does this.