Your boss Trevor Henry was so impressed with your work on the cash budget question, that you have now been promoted to senior manager making $193,000 per year at Gifting Inc.

Gifting Inc. is looking to evaluate a project and needs to find the weighted average cost of capital.The company has a target debt to equity ratio of .75, with a tax rate of 30%.The company's stock has a beta of .63, government T-bills are yielding 1% and analysts are forecasting an 11% market risk premium.The company just issued a $0.25 dividend and the CEO states that dividends will grow 6.5% indefinitely.The stock is currently trading at $25 per share, and bonds in the market place with similar risk as Gifting Inc. are yielding 5%.What is the company's WACC?

The CEO of Gifting Inc. wants to understand why the company should not use 100% debt financing, since the after tax cost of debt is typically cheaper?In a brief paragraph (200 - 400 words) explain why the company can not do this.