Assume you have just been hired as a business manager ofPamela’s Pizza, a regional pizza restaurant chain. The firm iscurrently financed with all equity and it has 15 million sharesoutstanding. When you took your corporate finance course, yourinstructor stated that most firm’s owners would be financiallybetter off if the firms used some debt. When you suggested this toyour new boss, he encouraged you to pursue the idea. As a firststep, assume that you obtained from the firm’s investment bankerthe following estimated costs of debt for the firm at differentcapital structures:               

% Financed withDebt            rd                                                                              

0% ---                                

10 8.0%                                                               

25 9.0                                                            

35 10.5                                                                  

45 12.0           

If the company were to recapitalize, debt would be issued, andthe funds received would be used to repurchase stock. Pamela’sPizza is in the 25 percent state-plus-federal corporate taxbracket, its beta is 0.75, the risk-free rate is 4 percent, and themarket risk premium is 7 percent.     

For each capital structure under consideration,calculate the levered beta, the cost of equity, and theWACC.